20-F 1 v407664_20f.htm FORM 20-F

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F

(Mark one)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014.

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the transition period from ________ to _________

 

Commission file number 001-34944

 

China Ceramics Co., Ltd.

(Exact name of the Registrant as specified in its charter)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

 

c/o Jinjiang Hengda Ceramics Co., Ltd.
Junbing Industrial Zone
Anhai, Jinjiang City
Fujian Province, PRC
Telephone: +86 (595) 8576 5053

(Address of principal executive offices)

 

Huang Jia Dong
c/o Jinjiang Hengda Ceramics Co., Ltd.
Junbing Industrial Zone
Anhai, Jinjiang City
Fujian Province, PRC
Telephone: +86 (595) 8576 5053
Facsimile: +86 (595) 8576 5059

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

with a copy to:

 

Stuart Management Company
830 Post Road East
Suite 205
Westport, CT 06880

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

 

ORDINARY SHARES, PAR VALUE $0.001 The NASDAQ Stock Market LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None.

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None.

 

On April 17, 2015 the issuer had 20,430,838 shares outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨                  No x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨                  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨                  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

¨ Large Accelerated filer ¨ Accelerated filer x Non-accelerated filer

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

¨ US GAAP x   International Financial Reporting Standards as issued by the International  Accounting Standards Board ¨ Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17          ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                  No x

 

 
 

 

Table of Contents

 

      Page
       
PART I   6
       
  ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 6
       
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 6
       
  ITEM 3. KEY INFORMATION 6
       
  ITEM 4. INFORMATION ON THE COMPANY 26
       
    ITEM 4A. UNRESOLVED STAFF COMMENTS 50
       
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 51
       
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 74
       
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 86
       
  ITEM 8. FINANCIAL INFORMATION 89
       
  ITEM 9. THE OFFER AND LISTING 91
       
  ITEM 10. ADDITIONAL INFORMATION 92
       
  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 107
       
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 109
       
PART II   109
       
  ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 109
       
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 109
       
  ITEM 15. CONTROLS AND PROCEDURES 109
       
  ITEM 16. RESERVED 111
       
    ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT. 111
         
    ITEM 16B. CODE OF ETHICS. 111
         
    ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 112

 

2
 

 

    ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. 112
         
    ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. 112
         
    ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT. 112
         
    ITEM 16G. CORPORATE GOVERNANCE 114
         
    ITEM 16H. MINE SAFETY DISCLOSURE 114
       
PART III   114
       
  ITEM 17. FINANCIAL STATEMENTS 114
       
  ITEM 18. FINANCIAL STATEMENTS 114
       
  ITEM 19. EXHIBITS 115

 

3
 

 

CERTAIN INFORMATION

 

In this Annual Report on Form 20-F (the “Annual Report”), unless otherwise indicated, “we,” “us,” “our,” and “China Ceramics” refers to China Ceramics Co., Ltd., a British Virgin Islands company, and its subsidiaries, including Success Winner Limited (“Success Winner”), a British Virgin Islands company and wholly owned subsidiary of China Ceramics, Stand Best Creation Limited (“Stand Best”), a Hong Kong company and wholly owned subsidiary of Success Winner and the entity that wholly owns Jinjiang Hengda Ceramics Co., Ltd. (“Hengda”), a PRC operating company that in turn wholly owns Jiangxi Hengdali Ceramic Materials Co., Ltd. (“Hengdali”), and Fujian Province Hengdali Building Materials Co., Ltd. each a PRC operating company.

 

On November 20, 2009, China Holdings Acquisition Corp. (“CHAC”), our predecessor, merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, resulting in the redomestication of CHAC to the British Virgin Islands as “China Ceramics Co., Ltd.” Immediately following the merger and redomestication (the “Redomestication”), and as part of the same integrated transaction, China Ceramics acquired all of the outstanding securities of Success Winner (the “Business Combination”). Unless the context indicates otherwise, the “Company” refers to CHAC prior to the Business Combination and China Ceramics following the Business Combination.

 

Unless the context indicates otherwise, all references to “China” or “PRC” refer to the People’s Republic of China. All references to “provincial-level regions” or “regions” include provinces as well as autonomous regions and directly controlled municipalities in China, which have an administrative status equal to provinces, including Beijing.

 

All references to “Renminbi,” “RMB” or “yuan” are to the legal currency of the People’s Republic of China, and all references to “U.S. dollars,” “dollars,” “$” are to the legal currency of the United States. This Report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On April 10, 2015, the buying rate announced by the Federal Reserve Statistical Release was RMB 6.2082 to $1.00.

 

FORWARD-LOOKING STATEMENTS

 

This Report contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

 

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based on the success of our business.

 

4
 

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this Annual Report.

 

This Annual Report should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.

 

5
 

 

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not required.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not required.

 

ITEM 3.KEY INFORMATION

 

A.Selected financial data

 

The following selected consolidated financial data as of and for the years ended December 31, 2014, 2013, 2012 have been derived from the audited consolidated financial statements of China Ceramics included in this Annual Report and the financial data as of and for the years ended December 31, 2011 and 2010 have been derived from previously filed audited consolidated financial statements. This information is only a summary and should be read together with the consolidated financial statements, the related notes, the section entitled “Operating and Financial Review and Prospects” and other financial information included in this Annual Report.

 

The consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board (“IASB”). The results of operations of China Ceramics in any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” included elsewhere in this Annual Report.

 

CHINA CERAMICS CO., LTD. AND SUBSIDIARIES

 

Selected Consolidated Financial Data

 

(RMB in Thousands Except per Share and Operating Data)

 

   As of December 31 
   2014   2013   2012   2011   2010 
Consolidated Statements of Financial Position Data                         
Cash and cash equivalents   61,155    28,848    89,448    42,149    263,495 
Total current assets   972,893    880,201    840,028    833,516    732,595 
Total assets   1,733,563    1,726,240    1,671,403    1,711,947    1,227,427 
Total current liabilities   284,535    305,423    177,161    457,121    319,066 
Long-term obligations   1,404    1,245    51,052    61,087    26,122 
Total liabilities   285,939    306,668    228,213    518,208    345,188 
Total equity   1,447,624    1,419,572    1,443,190    1,193,739    882,239 
Outstanding shares   20,430,838    20,430,838    20,430,838    18,254,002    16,459,202 

 

6
 

 

   For the years ended December 31, 
   2014   2013   2012   2011   2010 
Consolidated Statement of Comprehensive Income Data                         
Revenues   1,037,651    932,894    1,444,891    1,491,574    1,068,551 
Gross profit   104,431    54,076    380,999    467,238    338,975 
Operating income   56,095    12,496    330,328    398,260    300,105 
(Loss)/profit before taxation   (13,890)   (3,697)   328,763    400,504    304,071 
(Loss)/profit attributable to shareholders   (30,353)   (2,032)   243,831    294,439    225,474 
                          
Earnings per share –                         
Basic   (1.49)   (0.10)   11.93    16.13    19.61 
Diluted   (1.49)   (0.10)   11.93    14.41    16.96 
                          
Weighted average shares outstanding –                         
Basic   20,430,838    20,430,838    20,430,838    18,254,002    11,497,389 
Diluted   20,430,838    20,430,838    20,430,838    20,430,838    13,292,189 
                          
Cash dividends declared per share (RMB)   0.16    1.22    -    -    - 

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. On April 10, 2015, the buying rate announced by Federal Reserve Statistical Release was RMB 6.2082 to $1.00.

 

   Spot Exchange Rate 
Period  Period
Ended		   Average (1)   Low   High 
   (RMB per US$1.00) 
2010   6.6000    6.7603    6.6000    6.8305 
2011   6.2939    6.4475    6.2939    6.6017 
2012   6.2301    6.3093    6.2221    6.3879 
2013   6.0537    6.1478    6.0537    6.2438 
2014   6.2046    6.1619    6.0402    6.2591 
October   6.1124    6.1251    6.1107    6.1385 
November   6.1429    6.1249    6.1117    6.1429 
December   6.2046    6.1886    6.1490    6.2256 
2015                    
January   6.2495    6.2181    6.1870    6.2535 
February   6.2695    6.2518    6.2399    6.2695 
March   6.1990    6.2384    6.1955    6.2741 

 

7
 

 

Source:  Federal Reserve Statistical Release

 

(1)Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using the average of the daily rates during the relevant period.

 

B.Capitalization and Indebtedness

 

Not required.

 

C.Reasons for the Offer and Use of Proceeds

 

Not required.

 

D.Risk factors

 

You should carefully consider the following risk factors, together with all of the other information included in this annual report.

 

Risk Factors Relating to Our Business

 

We generate a large percentage of our revenues from a limited number of customers and our business will suffer if sales to such customers decline.

 

Our five largest customers accounted for an aggregate of 18.4%, 20.1% and 20.0% of our total revenue in fiscal years 2012, 2013 and 2014, respectively. We are particularly exposed to the credit risks of these customers as defaults in payment by our major customers would have a significant impact on our cash flows and financial results. Our agreements with our major customers do not specify minimum sales volume. There is no assurance that we will continue to retain these customers or that they will continue to purchase our products at their current levels in the future. If there is any reduction or cancellation of purchase orders by these customers for any reason, including a fall in demand from our customers’ downstream developer clients, or a termination of a relationship with these customers, our revenues will be negatively impacted.

 

Payment defaults by the customers to whom we extend credit would harm our cash flows and results.

 

Our financial position and profitability is dependent on the creditworthiness of our customers. We are exposed to the credit risks of our customers and this risk increases the larger the orders are. We usually offer our customers credit terms of approximately 120 to 150 days. Although there has not been any material collection problem for trade receivables or bad debts in the last three fiscal years, there is no assurance that we will not encounter doubtful or bad debts in the future. We have not established any bad debt reserves to mitigate the financial impact of uncollected accounts receivable. Should we experience any unexpected delay or difficulty in collecting receivables from our customers, our cash flows and financial results may be adversely affected.

 

8
 

 

If our suppliers are unable to fulfill our orders for raw materials, we may lose business.

 

Our suppliers are all located in the PRC. Our purchases of raw materials is based on expected production levels, after taking into consideration, amongst other factors, sales forecasts and actual orders from our customers. To ensure that we are able to deliver quality products at competitive prices, we need to secure sufficient quantities of raw materials at acceptable prices and quality on a timely basis. Typically, we do not enter into any long-term supply agreements with our suppliers. There is no assurance that these suppliers will continue to supply us in the future or that they will do so at acceptable prices. In the event our suppliers are unable to fulfill our orders or meet our requirements, we may not be able to find timely replacements at acceptable prices and quality, and this will delay the fulfillment of our customers’ orders. Consequently, our reputation may be negatively affected, leading to a loss of business and affecting our ability to attract new business.

 

Raw materials and energy sources comprise a substantial portion of our cost of sales and increases in the price of raw materials and energy sources will negatively impact our profitability.

 

In fiscal years 2012, 2013 and 2014 our cost of raw materials and energy source, which consist of clay (comprising mainly of kaolin, flint and feldspar), coal and natural gas (used to heat our kilns), coloring materials and glazing materials, accounted for approximately 70.9%, 68.7% and 73.8% of our total cost of sales, respectively. The price of clay, coal, natural gas, coloring materials and glazing materials may fluctuate due to factors such as global supply and demand for such raw materials and changes in global economic conditions. Coal and natural gas in aggregate accounted for approximately 27.9%, 22.6% and 22.2% of our total costs of raw materials and energy source in fiscal years 2012, 2013 and 2014, respectively. Any shortages or interruptions in the supply of clay, coal and natural gas, coloring materials or glazing materials will result in an increase in the cost of production, thus increasing our cost of sales. If we are not able to pass on such an increase to our customers or are unable to find alternative sources of clay, coal, coloring materials, or glazing materials or appropriate substitute raw materials at comparable prices, our gross margins and overall financial performance will be adversely affected.

 

If China’s inflation increases or the prices of energy or raw materials increase, we may not be able to pass the resulting increased costs to our customers and this may adversely affect our profitability or cause us to suffer operating losses.

 

Economic growth in China has, in the past, been accompanied by periods of high inflation. In the past, the Chinese government has implemented various policies from time to time to control inflation. For example, the Chinese government has periodically introduced measures in certain sectors to avoid overheating of the economy, including tighter bank lending policies, increases in bank interest rates, and measures to curb inflation, which has resulted in a decrease in the rate of inflation. An increase in inflation could cause our costs for energy, labor costs, raw materials and other operating costs to increase, which would adversely affect our financial condition and results of operations.

 

We are dependent on our management team and any loss of our key management personnel without timely and suitable replacements may reduce our revenues and profits.

 

Our chief executive officer, Huang Jia Dong, and our Sales Deputy General Manager, Su Pei Zhi, have worked with our company since founding it over nineteen years ago. Accordingly, our success is dependent to a large extent on our ability to retain Messrs. Huang and Su, who are responsible for formulating and implementing our growth, corporate development and overall business strategies. Mr. Huang currently beneficially owns 8,345,308 shares in us. Our employment agreements with Messrs. Huang and Su end on January 31, 2016, and there is no assurance that we will be able to enter new long-term agreements with Messrs. Huang or Su. Our business is also dependent on our executive officers who are responsible for implementing our business plans and driving growth. Please refer to “Directors, Senior Management and Employees” herein for more information about our directors and officers.

 

The demand for such experienced personnel is intense and the search for personnel with the relevant skills set can be time consuming. The loss of our key management personnel without timely and suitable replacements may reduce our revenues and profits.

 

9
 

 

Failure to compete successfully with our competitors and new entrants to the ceramics industry in the PRC may result in China Ceramics losing market share.

 

We operate in a competitive and fragmented industry. There is no assurance that we will not face competition from our existing competitors and new entrants. We compete with a variety of companies, some of which have advantages that include: longer operating history, larger clientele base, superior products, better access to capital, personnel and technology, or are better entrenched. Our competitors may be able to respond more quickly to new and emerging technologies and changes in customer requirements or succeed in developing products that are more effective or less costly than our products. Any increase in competition could have a negative impact on our pricing (thus eroding our profit margins) and reduce our market share. If we are unable to compete effectively with our existing and future competitors and do not adapt quickly to changing market conditions, we may lose market share.

 

We have not purchased product liability insurance and any loss resulting from product liability claims must be paid by us.

 

Accidents may arise as a result of defects in our products. If there are any defects in the products designed and/or manufactured by us, we may face claims from our customers or third parties for the personal injury or property damage suffered as a result of such defects. We have not purchased insurance coverage for product liability or third party liability and are therefore not covered or compensated by insurance in respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability.

 

Our production facilities may be affected by the natural gas supply and power shortages which could result in a loss of business.

 

Our production facilities consume substantial amounts of natural gas and electrical power, which are the principal source of energy for our manufacturing operations. Although we have a back-up generator at both our production facilities, we may experience occasional temporary power shortages disrupting production due to power rationing activities conducted by the authorities, thunderstorms or other natural events beyond our control. Accordingly, these production disruptions could result in a loss of business.

 

Our research and development efforts may not result in marketable products.

 

Our research and development team develops products which we have identified as having good potential in the market. There is no assurance that we will not experience delays in future product developments. There is also no assurance that the products which we are currently developing or may develop in the future will be successful or that we will be able to market these new products to our customers successfully. If our new products are unable to gain the acceptance of our customers or potential customers, we will not be able to generate future sales from our investment in research and development.

 

We may not be able to ensure the successful implementation of our future plans and strategies, resulting in reduced financial performance.

 

We intend to expand our market presence and explore opportunities in strategic investments or alliances and acquisitions. These initiatives involve various risks including, but not limited to, the investment costs in setting up new offices and sales offices and working capital requirements. There is no assurance that any future plan can be successfully implemented as the successful execution could depend on several factors, some of which are not within our control. Failure to successfully implement our future plans or to effectively manage costs may lead to a material adverse change in our operating environment or affect our ability to respond to market or industry changes, resulting in reduced financial performance.

 

10
 

 

Due to reduced demand for our products, we are currently operating our facilities at significantly less than our maximum capacity, which could reduce our profitability.

 

Our facilities currently provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, due to a reduction in demand, we are currently utilizing production facilities capable of producing only 37 million square meters. In addition, we currently have sixteen production lines of which only nine were utilized as of the end of 2014 due to challenging macroeconomic conditions that began in the fourth quarter of 2012. The fact that a significant portion of our facilities are not being used means that our net income will be significantly less than it would otherwise be because we must maintain those unused facilities even though they are not currently being productive. In addition, if our facilities remain idle for an extended period of time, we may be required to take an impairment charge on our financial statements. In light of the existence of idle assets at Hengdali, an impairment assessment has been performed by the directors of the Company to determine the recoverable amount of the property, plant and equipment. The directors of the Company engaged an independent appraiser to assist the Company to perform a valuation of the property, plant and equipment for impairment assessment. No impairment loss on property, plant and equipment was recorded for 2014, 2013 and 2012, but further reductions in demand could result in the impairment in the recoverable amount of our property, plant and equipment in the future with a resulting reduction in our net income.

 

In late 2012 and early 2013, we significantly reduced the selling prices of our products in order to maintain market share, which reduced our revenues and net income for 2013. However, we raised our selling price on all of our products on July 1, 2014 which increased revenue gains in 2014.

 

In order to maintain our market share, we significantly reduced the selling price of certain of our products at the end of 2012 and the beginning of 2013. Our revenues and net income for those periods were lower than they would otherwise be due to such reductions. In addition, if clients grow accustomed to such significant reductions, we may need to offer significant discounts in the future, which could reduce our net income and revenues long term. However, we raised our selling price on all of our products on July 1, 2014 by about 5% to 10% attributable to a moderately improved macroeconomic environment. We believe our strong marketing efforts and long-standing reputation for best-in-class products and service will allow us to maintain these increased prices, but there is no assurance that we will not be required in the future to reduce our prices again to maintain market share.

 

We may lose revenue if our intellectual property rights are not protected and counterfeit HD, Hengda, HDL, Hengdeli, WULIQIAO, TOERTO or Pottery Capital of Tang Dynasty brand products are sold in the market.

 

We believe our intellectual property rights are important to our success and competitive position. A portion of our products are manufactured and marketed under our “HD” or “Hengda,” “HDL” or “Hengdeli,” “Pottery Capital of Tang Dynasty”, “TOERTO” and “WULIQIAO” labels. We have filed our labels as trademarks in the PRC. Before April13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and was licensed the exclusive right to use WULIQIAO during the term of that trademark. On April 13, 2011, WULIQIAO was transferred to Hengdali, according to the Certificate of Approved Transference of Trademark issued on April 13, 2011 by the Trademark Office of the State Administration for Industry & Commerce of the PRC. In addition, we own twenty-two utility model patents and have certain trade secrets and unpatented proprietary technology. We cannot assure you that there will not be any unauthorized usage or misuse of our trademarks and patent rights or that our intellectual property rights will be adequately protected as it may be difficult and costly to monitor any infringements of our intellectual property rights in the PRC. If we cannot adequately protect our intellectual property, we may lose revenue.

 

In addition, we believe the branding of our products and the brand equity in our “HD” or “Hengda”, “HDL or Hengdeli”, “Pottery Capital of Tang Dynasty”, “TOERTO” and “WULIQIAO” trademarks is critical to our expansion effort and the continued success of our business. Our efforts to build our brand may be undermined by the sale of counterfeit goods. The counterfeiting of our products may increase if our products become more popular.

 

11
 

 

In order to preserve and enforce our intellectual property rights, we may have to resort to litigation against the infringing or counterfeiting parties. Such litigation could result in substantial costs and diversion of management resources which may have an effect on our financial performance.

 

We may inadvertently infringe third-party intellectual property rights, which could negatively impact our business and financial results.

 

We are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property rights of third parties by us as of the date of this Annual Report. Nevertheless, there can be no assurance that as we develop new product designs and production methods, we would not inadvertently infringe the intellectual property rights of others or others would not assert infringement claims against us or claim that we have infringed their intellectual property rights. Claims against us, even if untrue or baseless, could result in significant costs, legal or otherwise, cause product shipment delays, require us to develop non-infringing products, enter into licensing agreements or may be a distraction to our management. Licensing agreements, if required, may not be available on terms acceptable to us or at all. In the event of a successful claim of intellectual property rights infringement against us and our failure or inability to develop non-infringing products or to license the infringed intellectual property rights in a timely or cost-effective basis, our business and/or financial results will be negatively impacted.

 

The PRC government has introduced certain policy and regulatory measures to control the rapid increase in housing prices and cool down the real estate construction market and the government may adopt further measures in the future that may further adversely affect our business.

 

Our business depends on the level of business activity in the property development and construction industries that use our products in their operations in the PRC. Our products are sold to customers in the property development and construction industries. If the property and construction industries fall into a recession in the future, the demand for construction materials, such as ceramic tiles, may consequently decrease and have a significant adverse effect on our business.

 

The PRC government has committed to taking steps to regulate real estate development, promote the healthy development of the real estate industry in China, and strengthen the supervision over land for real estate development purposes. For example, in his 2010 annual report to the National People’s Congress, as part of the 12th Five-Year Plan, Chinese Premier Wen Jiabao pledged to curb the rise of housing prices in certain cities to increase the availability of affordable housing. The program targets 36 million units of new housing by 2015 at a cost of nearly $800 million. The full effect of such policies on the real estate industry and our business will depend in large part on the implementation and interpretation of the circulars by governmental agencies, local governments, and banks involved in the real estate industry. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive measures or practices in response to PRC governmental policies and regulations, which could negatively affect the industries we serve in the PRC, and thereby harm our sales.

 

Our manufacturing activities are dependent upon availability of skilled and unskilled labor, a deficiency of which could result in a reduction in profits.

 

Our manufacturing activities are labor intensive and dependent on the availability of skilled and unskilled labor in large numbers. Large labor intensive operations call for good monitoring and maintenance of cordial relations. Non-availability of labor, poor labor management and/or any disputes between the labor and management may result in a reduction in profits. Further, we rely on contractors who engage on-site laborers for performance of many of our unskilled operations. The scarcity or unavailability of contract laborers may affect our operations and financial performance.

 

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We face increasing labor costs and other costs of production in the PRC, which could limit our profitability.

 

The ceramic tile manufacturing industry is labor intensive. Labor costs in China have been increasing in recent years and our labor costs in the PRC could continue to increase in the future. If labor costs in the PRC continue to increase, our production costs will likely increase which may in turn affect the selling prices of our products. We may not be able to pass on these increased costs to consumers by increasing the selling prices of our products in light of competitive pressure in the markets where we operate. In such circumstances, our profit margin may decrease.

 

Violation of the Foreign Corrupt Practices Act or China anti-corruption law could subject us to penalties and other adverse consequences.

 

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States public companies from bribing or making prohibited payments to foreign officials to obtain or retain business. PRC law also strictly prohibits bribery of government officials. While we take precautions to educate our employees about the Foreign Corrupt Practices Act and Chinese anti-corruption law, there can be no assurance that we or the employees or agents of our subsidiaries will not engage in such conduct, for which we may be held responsible. If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial condition and results of operations.

 

During the years ended December 31, 2013 and 2014, we entered into foreign currency transaction agreements that resulted in significant losses to us in 2014.

 

During 2013 and 2014, we entered into certain foreign currency transaction agreements with a financial institution related to the movement of the Renminbi against the U.S. dollar. We recorded realized and unrealized fair value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. In 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 59,477,000 ($9,586,000) for the year ended December 31, 2014 in connection with these agreements. In July 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, agreed to assume these agreements. As a result, we will not be required to fund any losses related to these agreements and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.

 

We had a material weakness in our internal control in financial reporting as of December 31, 2012, 2013 and 2014 and uch material weakness could adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.

 

Our management identified material weaknesses and concluded that our internal control over financial reporting were not effective as of December 31, 2012, 2013 and 2014. A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

The specific material weakness we identified in our internal control over financial reporting for 2012, 2013 and 2014 related to the lack of sufficient qualified accounting personnel with appropriate understanding of IFRS and SEC reporting requirements commensurate with our financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant.

 

We have taken steps to enhance our supervision, monitoring and review of the financial statements preparation processes, including:

 

1.We adopted additional internal review procedures with respect to required disclosures in the reports that we file with, or submit to, the SEC under the Exchange Act.

 

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2.On July 24, 2014, we contracted with a US internal control consulting firm to act as our consultant to conduct a separate and independent review of our financial reporting.

 

3.Our finance and accounting staff members have attended seminars organized by professional accountancy bodies.

 

Until such time we hire sufficient qualified accounting personnel with appropriate understanding of IFRS and SEC reporting requirements, however, the measures we have taken may not be sufficient to mitigate the risks associated with the lack of qualified accounting personnel.

 

Any failure to maintain internal control could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either case, there could result a material adverse effect on our business. Inferior internal control could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. We can give no assurance that additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

 

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board (“PCAOB”) and, as such, you are deprived of the benefits of such inspection.

 

Auditors of companies whose shares are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards applicable to auditors. Because we have substantial operations within the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

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Proceedings instituted by the SEC against certain PRC-based accounting firms could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

On December 3, 2012, the SEC issued an order instituting administrative proceedings against five of the largest global public accounting firms relating to work performed in the PRC and such firms’ failure to provide audit work papers to the SEC in this regard. Our independent registered public accounting firm is not one of the accounting firms referenced in the order. On January 22, 2014, an initial administrative law decision was issued, censuring the five accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our shares may be adversely affected.

 

If our independent registered public accounting firm was denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act.

 

Risk Factors Relating to Operations in China

 

We are dependent on political, economic, regulatory and social conditions in the PRC.

 

Approximately 94% of our revenue in each of the last three fiscal years was derived from the PRC market and we anticipate that the PRC market will continue to be the major source of revenue for the foreseeable future. Accordingly, any significant slowdown in the PRC economy or decline in demand for our products from our customers in the PRC will have an adverse effect on our business and financial performance. Furthermore, as our operations and production facilities are located in the PRC, any unfavorable changes in the social and/or political conditions may also adversely affect our business and operations.

 

While the current policy of the PRC government seems to be one of economic reform to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future. There is no assurance that our operations will not be adversely affected should there be any policy changes.

 

We are subject to risks related to the laws and regulations of the PRC and the interpretation and implementation thereof.

 

Our business and operations, as well as those of our customers and suppliers in the PRC, are subject to the laws and regulations promulgated by relevant PRC governmental authorities. The PRC government is still in the process of developing a comprehensive set of laws and regulations in the course of the PRC’s transformation from a centrally planned economy to a more free market oriented economy. As the legal system in the PRC is still in flux, laws and regulations or their interpretation may be subject to change. Furthermore, any change in the political and economic policy of the PRC government may also result in similar changes in the laws and regulations or the interpretation thereof. Such changes may adversely affect our operations and business in the PRC.

 

The PRC legal system is a codified legal system comprising written laws, regulations, circulars, administrative directives, and internal guidelines as well as judicial interpretations. Decided cases do not form part of the legal structure of the PRC and thus have no binding effect. As such, the administration of PRC laws and regulations may be subject to a certain degree of discretion by the authorities. This has resulted in the outcome of dispute resolutions not having the level of consistency or predictability as in other countries with more developed legal systems. Due to such inconsistency and unpredictability, if we should be involved in any legal dispute in the PRC, we may experience difficulties in obtaining legal redress or in enforcing our legal rights.

 

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From time to time, changes in law, registration requirements, and regulations or the implementation thereof may also require us to obtain additional approvals and licenses from the PRC authorities for carrying out our operations in the PRC which would require us to incur additional expenses in order to comply with such requirements and in turn affect our financial performance with the increase in our business costs. Furthermore, there can be no assurance that approvals, registrations, or licenses will be granted to us promptly or at all. If we experience delays in obtaining or are unable to obtain such required approvals, registrations, or licenses, our operations and business in the PRC, and hence our overall financial performance will be adversely affected.

 

Our business activities are subject to certain PRC laws and regulations.

 

As our production and operations are carried out in the PRC, we are subject to certain PRC laws and regulations. In addition, being wholly foreign-owned enterprises, we are required to comply with certain additional laws and regulations. Pursuant to PRC laws and regulations, the breach or non-compliance with such laws and regulations may result in the PRC authorities suspending, withdrawing or terminating our business license, causing us to cease production of all or certain of our products, and this would materially and adversely affect our business and financial performance.

 

Our corporate affairs in the PRC are governed by our articles of association and the corporate and foreign investment laws and regulations of the PRC. The principles of the PRC laws relating to matters such as the fiduciary duties of directors and other corporate governance matters and foreign investment laws in the PRC are relatively new. Hence, the enforcement of investors or shareholders’ rights under the articles of association of a PRC company and the interpretation of the relevant laws relating to corporate governance matters remain largely untested in the PRC.

 

PRC foreign exchange control may limit our ability to utilize our profits effectively and affect our ability to receive dividends and other payments from our PRC subsidiaries.

 

Hengda is a foreign investment enterprise, or “FIE,” and is subject to the rules and regulations in the PRC on currency conversion. In the PRC, State Administration of Foreign Exchange, or SAFE, regulates the conversion of the RMB into foreign currencies. Currently, FIEs are required to apply to SAFE for “Foreign Exchange Registration Certificates for Foreign Investment Enterprise”. With such registration certifications (which need to be renewed annually), FIEs are allowed to open foreign currency accounts including the “current account” and “capital account”. Currently, conversion of currency within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.

 

On October 21, 2005, SAFE promulgated the “Notice on Issues concerning Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle and Return Investments” (the “No. 75 Notice”).

 

The No. 75 Notice came into effect on November 1, 2005 and requires the following matters, among others, to be complied with: every PRC domestic resident who establishes or controls an overseas special purpose vehicle, or “SPV,” must apply to the local bureau of SAFE for an “overseas investment foreign exchange registration.”

 

Every PRC domestic resident of an SPV who has completed the “overseas investment foreign exchange registration”, or “Registrant,” must make an application to the local bureau of SAFE to amend their registration particulars upon (i) the injection of any PRC domestic assets or the equity interests of any PRC domestic company owned by the PRC domestic resident into the SPV, and (ii) the implementation of any overseas equity fund-raising by the SPV following an injection of PRC domestic assets or the equity interests of a PRC domestic company; every Registrant must apply to the local bureau of SAFE for change of registration particulars or recordation within 30 days after the occurrence of any capital increase or reduction, changes in shareholdings or share swap, merger, long-term investment in equities or debentures, guarantee of foreign indebtedness and other major capital changes not involving “return investment”, undertaken by an SPV; and every Registrant must repatriate, within 180 days, dividends or profits which he receives from an SPV and/or income derived from changes in the shareholding of an SPV.

 

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On 14 July 2014, China’s State Administration of Foreign Exchange (SAFE), the foreign exchange control authority, released the Notice of the State Administration of Foreign Exchange on Relevant Issues Concerning Foreign Exchange Administration for Overseas Investment, Financing and Round Trip Investment Undertaken by Domestic Residents via Special Purpose Vehicles (Notice 37). The new regulation took effect 4 July 2014. At that time, the old regulation, “Notice on Issues concerning Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle and Return Investments” (the “No. 75 Notice”), which was issued in 2005, was repealed. Compared with Circular 75, Circular 37 reflects the trend of SAFE’s policy to gradually loosen the restrictions and simplify the procedures for overseas financing and investment by Chinese residents, so as to fully utilize the financial resources in domestic and overseas markets. However, as Circular 37 has only recently been issued, the actual interpretation and enforcement of the above changes by SAFE in practice remain to be seen.

 

There can be no assurance that SAFE will not continue to issue new rules and regulations and/or further interpretations of the No. 37 Notice that will strengthen the foreign exchange control. As we are located in the PRC and all of our sales are denominated in RMB, our ability to pay dividends or make other distributions may be restricted by PRC foreign exchange control restrictions. There can be no assurance that the relevant regulations will not be amended to our detriment and that our ability to distribute dividends will not be adversely affected.

 

Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business.

 

The PRC legal system is based on the Constitution of the People’s Republic of China and is made up of written laws, regulations, circulars and directives. With the PRC’s entry into the WTO, the PRC government is in the process of developing its legal system so as to encourage foreign investments and to meet the needs of investors. As the PRC economy is developing at a generally faster rate than its legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations will apply to certain events or circumstances. Some of the laws and regulations, and the interpretation, implementation and enforcement thereof, are still at the experimental stage and therefore subject to policy changes. There is no assurance that the introduction of new laws or regulations, changes to existing laws and regulations and the interpretation or application thereof or the delays in obtaining approvals from the relevant PRC authorities will not have an adverse impact on our business or prospects.

 

In particular, on August 8, 2006, the Ministry of Commerce, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration of Industry and Commerce and the State Administration of Foreign Exchange promulgated the “Rules on the Mergers and Acquisition of Domestic Enterprises by Foreign Investors” which came into effect on September 8, 2006, or “the M&A Rules.” Foreign investors should comply with the rules when they purchase shareholding equities of a PRC domestic non-foreign-funded enterprise, or Domestic Company, or subscribe to the increased capital of a Domestic Company, and thus changing the nature of the Domestic Company into a foreign investment enterprise. The rules stipulate, inter alia, (i) that the acquisition of a Domestic Company by an affiliated foreign enterprise established or controlled by PRC entities or individuals must be approved by the Ministry of Commerce; (ii) that the incorporation of a special purpose vehicle, which is directly or indirectly controlled by PRC entities for the purpose of an overseas listing of the equity interest of a Domestic Company, must be subject to the approval of the Ministry of Commerce; (iii) that the acquisition of a Domestic Company by a special purpose vehicle shall be subject to approval of the Ministry of Commerce and (iv) the offshore listing of a special purpose vehicle shall be subject to the prior approval from China Securities Regulatory Commission.

 

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As Hengda was incorporated as a FIE and China Ceramics does not fall within the scope of being classified as a special purpose vehicle directly or indirectly established or controlled by PRC entities or individuals, the M&A Rules did not apply to the Business Combination, and we were not required to obtain the approval from the Ministry of Commerce, the approval from the China Securities Regulatory Commission and/or any other approvals from PRC government authorities as stipulated by the M&A Rules. There is however no assurance that the PRC authorities will not issue further directives, regulations, clarifications or implementation rules, which may require us or other relevant parties to obtain further approvals with respect to the Business Combination. If new laws are promulgated or the existing laws are reinterpreted, our structure could be determined to be in violation of such laws and subject to sanction by applicable government authorities.

 

Environmental, health and safety laws have in the past and may in the future impose material liabilities on us and require us to incur material capital and operational costs.

 

We are subject to environmental, health and safety laws and regulations in the PRC that impose controls on our air, water and waste discharges, on our storage, handling, use, discharge and disposal of chemicals, and on exposure of our employees to hazardous substances. These laws and regulations could require us to incur costs to maintain compliance and could impose liability to remedy the effects of hazardous substance contamination. Although we do not believe that we have violated any of such laws and regulations and therefore have not incurred any significant liabilities under these laws and regulations in the past, the environmental laws and regulations are constantly evolving and becoming stricter in the PRC. The adoption of new laws or regulations or our failure to comply with these laws or regulations in the future could cause us to incur material liabilities and could require us to incur additional expenses, curtail operations and/or restrict our ability to expand. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency.

 

During 2014, our Hengda facility was required by the local governmental entity to begin using natural gas to operate the facility, as opposed to coal. This mandated change in fuel source is part of a province-wide (and country-wide) effort to reduce pollution. This change resulted in our incurring a one-time charge of approximately RMB 5.6 million ($0.9 million) in December 2013, and has increased our cost of goods produced at that facility because natural gas is a more expensive energy source than coal. There is no assurance that in the future our other production facilities will not be required to make similar modifications which could have similar adverse effects on our operations.

 

Our business will suffer if we lose our land use rights.

 

There is no private ownership of land in China and all land ownership is held by the government of China, its agencies, and collectives. In the case of land used for business purposes, land use rights can be obtained from the government for a period up to 50 years, and are typically renewable. Land use rights can be granted upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required land granting fee, the entry into a land use agreement with a competent governmental authority and certain other ministerial procedures. We have received land use certificates for certain parcels of land on which our operations reside, but we may not have followed all procedures required to obtain such certificates or paid all required fees. If the Chinese administrative authorities determine that we have not fully complied with all procedures and requirements needed to hold a land use certificate, we may be forced by the Chinese administrative authorities to retroactively comply with such procedures and requirements, which may be burdensome and require us to make payments, or such Chinese administrative authorities may invalidate or revoke our land use certificate entirely. If the land use right certificates needed for our operations are determined by the government of China to be invalid or if they are not renewed, we may lose production facilities or employee accommodations that would be difficult or even impossible to replace. Should we have to relocate, our workforce may be unable or unwilling to work in the new location and our business operations will be disrupted during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase our costs of production, which would negatively impact our financial results.

 

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We own certain buildings collectively, which may limit our right to use, renovate or dispose of such buildings.

 

Together with three other companies, we collectively own several buildings located at the Junbing Industrial Zone in Jinjiang City with a total construction area of 29,120.83 square meters. As a result, our right to use, renovate and dispose of such buildings may be limited.

 

Our business will suffer if we fail to comply with environmental protection regulations

 

Companies which cause severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within a prescribed time limit. If a company fails to report and/or register the environmental pollution it caused, it will receive a warning or be penalized. Companies that fail to restore the environment or remedy the effects of the pollution within the prescribed time will be penalized or have their business licenses terminated. Companies that have polluted and endangered the environment must bear the responsibility for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered as a result of such environmental pollution.

 

Our Hengda facility obtained a Temporary Pollutant Discharge Permit (JH(2013)ZZ No. 320) granted by Jinjiang City Environmental Protection Bureau that will expire on April 27, 2015. Hengda is currently in the process of applying for the renewal of the permit. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency. If Hengdali’s application is denied, or if the Hengdali facility is ordered to stop discharging pollutants or is fined, that could have a material adverse effect on our results of operations and financial condition.

 

Our corporate structure together with applicable law impede shareholders from asserting claims against us and our principals.

 

All of our operations and records, and all of our senior management are located in the People’s Republic of China. Shareholders of companies such as ours have limited ability to assert and collect on claims in litigation against such companies and their principals. In addition, China has very restrictive secrecy laws that prohibit the delivery of many of the financial records maintained by a business located in China to third parties absent Chinese government approval. Since discovery is an important part of proving a claim in litigation, and since most if not all of our records are in China, Chinese secrecy laws could frustrate efforts to prove a claim against us or our management.

 

In order to commence litigation in the United States against an individual such as an officer or director, that individual must be served. Generally, service requires the cooperation of the country in which a defendant resides. China has a history of failing to cooperate in efforts to affect such service upon Chinese citizens in China.

 

If we become directly subject to the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or defend the matter, which could harm our business operations, stock price and reputation and could result in a complete loss of your investment in us.

 

Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.

 

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Risks to China Ceramics’ Shareholders

 

If our shares again trade below $1.00 per share, we may be required to engage in a reverse sock split of our shares in order to continue to meet Nasdaq listing requirements.

 

Our sock traded below $1.00 per share from the end of last year to the beginning of this year, which resulted in our falling out of compliance with Nasdaq minimum bid price rules. Since that time, our share price has increased and we are again in compliance with the Nasdaq continued listing requirements. However, if our stock price declines again, we may be required to engage in a reverse split in order to bring our share price above $1.00 in order to comply with Nasdaq continued listing requirements. If a reverse split takes place, our trading volume may decrease, adversely affecting the ability of our shareholders to purchase or sell shares in the open market. In addition, reverse splits sometimes cause the trading price of the resulting security to be lower than the pre-split share price and there is no guarantee that a reverse split will maintain its share price on a post-reverse split adjusted basis above $1.00 to comply with Nasdaq continued listing requirements.

 

The price of our shares could be volatile and could decline at a time when you want to sell your holdings.

 

The price of our shares has been and may continue to be volatile, and that volatility may continue for an extended period of time. Since the completion of the business combination through April 10, 2015, the trading price of our shares ranged between $10.10 and $0.71 per share.

 

There is a risk that China Ceramics could have been treated as a domestic corporation for U.S. federal income tax purposes after the Redomestication and the Business Combination, which, among other things, could have resulted in significantly greater U.S. federal income tax liability to China Ceramics.

 

Section 7874(b) of the Internal Revenue Code of 1986, as amended (the “Code”) generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to a plan or series of related transactions substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% (of either the voting power or the value) of the stock of the acquiring corporation after the acquisition. Under regulations promulgated under Section 7874, a warrant holder of either the acquired corporation or the acquiring corporation generally is treated for this purpose as owning stock of the acquired corporation or the acquiring corporation, as the case may be, with a value equal to the excess of the value of the shares underlying the warrant over the exercise price of the warrant. If Section 7874(b) were to have applied to the Redomestication, then, among other things, China Ceramics, as the surviving entity, would have been subject to U.S. federal income tax on its worldwide taxable income following the Redomestication and the Business Combination as if China Ceramics were a domestic corporation.

 

Although Section 7874(b) should not have applied to treat China Ceramics as a domestic corporation for U.S. federal income tax purposes, due to the absence of full guidance on how the rules of Section 7874(b) applied to the transactions completed pursuant to the Redomestication and Business Combination, this result is not entirely free from doubt. Shareholders are urged to consult their own tax advisors on this issue. See the discussion in the section entitled “Taxation — United States Federal Income Taxation — Tax Treatment of China Ceramics After the Redomestication and the Business Combination.” The balance of this discussion assumes that China Ceramics has been and will be treated as a foreign corporation for U.S. federal income tax purposes.

 

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There is a risk that China Ceramics will be classified as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. holders of its shares.

 

In general, China Ceramics will be treated as a PFIC for any taxable year in which either (1) at least 75% of its gross income (including its pro rata share of the gross income of its 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of its assets (including its pro rata share of the assets of its 25% or more-owned corporate subsidiaries) produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If China Ceramics is determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section entitled “Taxation—United States Federal Income Taxation—General”) of its shares, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of the shares of China Ceramics or the receipt of certain excess distributions from China Ceramics and may be subject to additional reporting requirements. Based on the composition (and estimated values) of the assets and the nature of the income of China Ceramics and its subsidiaries during its 2014 taxable year, China Ceramics does not believe that it would be treated as a PFIC for such year. However, because China Ceramics has not performed a definitive analysis as to its PFIC status for its 2014 taxable year, there can be no assurance in respect to its PFIC status for such year. There also can be no assurance with respect to China Ceramics’ status as a PFIC for its current (2015) taxable year or any future taxable year. U.S. Holders of the shares of China Ceramics are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion in the section entitled “Taxation—United States Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”

 

Under the EIT Law, China Ceramics, Success Winner and/or Stand Best may be classified as a “resident enterprise” of the PRC. Such classification could result in PRC tax consequences to China Ceramics, our non-PRC resident shareholders, Success Winner and/or Stand Best.

 

On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as “resident enterprises” and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.

 

The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.

 

If the PRC tax authorities determine that China Ceramics, Success Winner and/or Stand Best is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, China Ceramics, Success Winner and/or Stand Best may be subject to the enterprise income tax at a rate of 25% on China Ceramics’, Success Winner’s and/or Stand Best’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from enterprise income tax. As a result, if China Ceramics, Success Winner and Stand Best are each treated as “qualified resident enterprises,” all dividends from Hengda to China Ceramics (through Success Winner and Stand Best) should be exempt from the PRC enterprise income tax.

 

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If Stand Best were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Stand Best receives from Hengda (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, provided that Stand Best owns more than 25% of the registered capital of Hengda continuously within 12 months immediately prior to obtaining such dividend from Hengda, and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the “PRC-Hong Kong Tax Treaty,” were otherwise applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Stand Best to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if Success Winner were treated as a “non-resident enterprise” under the EIT Law and Stand Best were treated as a “resident enterprise” under the EIT Law, then dividends Success Winner receives from Stand Best (assuming such dividends were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. A similar situation may arise if China Ceramics were treated as a “non-resident enterprise” under the EIT Law, and Success Winner were treated as a “resident enterprise” under the EIT Law. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.

 

Finally, if China Ceramics is determined to be a “resident enterprise” under the EIT Law, this could result in a situation in which a 10% PRC tax is imposed on dividends China Ceramics pays to its shareholders that are not tax residents of the PRC, or “non-resident investors,” and that are enterprises but not individuals, and gains derived by them from transferring China Ceramics’ shares, if such income is considered PRC-sourced income by the relevant PRC tax authorities. In such event, China Ceramics may be required to withhold a 10% PRC tax on any dividends paid to such non-resident investors. Such non-resident investors also may be responsible for paying PRC tax at a rate of 10% on any gain derived by such investors from the sale or transfer of China Ceramics’ shares in certain circumstances. China Ceramics would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws. Also, if China Ceramics is determined to be a “resident enterprise,” its nonresident investors who are individuals may also be subject to potential PRC individual income tax at a rate of 20% with respect to dividends received from China Ceramics and/or gains derived by them from the sale or transfer of China Ceramics’ shares.

 

Moreover, the State Administration of Taxation, or “SAT,” released Circular Guoshuihan No. 698, or Circular 698, on December 10, 2009 that reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses indirect equity transfers as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a nonresident investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the non-resident investor to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. We (or a nonresident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such non-resident investor’s investment in us).

 

In additional, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

 

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On February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-tax Resident Enterprise, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assesss reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident erterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a dirct transfer of the equity intersts in the PRC tas resident enterprise and other properties in China, As a result, gains derived from such indirect transfer may be subject on PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assetsby us. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer to shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom we purchase taxable assets to comply with thiese circulars, or to establish that our company and other non-resdient entreprises in our group should not be taxed under thers circulars, which may have a material adverseeffect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable incomen of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such potential acquisitions will be increased, which may have an advers effect on our financial condition and results of operations.

 

If any PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations). Shareholders should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits.

 

For a further discussion of these issues, see the section herein captioned “Taxation—PRC Taxation.”

 

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Fluctuations in exchange rates could adversely affect our business and the value of our shares.

 

The value of our shares will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those currencies and other currencies in which our revenue may be denominated. Because all of our earnings and cash assets are denominated in Renminbi, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds, as well as our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business, financial condition or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

 

Since July 2005, the Renminbi has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the Chinese authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to 2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant fluctuation in the RMB’s value against the U.S. Dollar.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.

 

During 2013 and 2014, we entered into certain foreign currency transaction agreements with a financial institution related to the fluctuation of the Renminbi against the U.S. dollar, not for hedging purposes but for investment purposes. We recorded fair value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 59,477,000 ($9,586,000) for the year ended December 31, 2014 in connection with these agreements. We do not intend to enter into similar transactions for investment purposes n the future.

 

As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

 

Our corporate affairs will be governed by our memorandum and articles of association, the BVI Business Companies Act, 2004 (as amended) (the BVI Act), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which is applied in the British Virgin Islands by virtue of the Common Law (Declaration of Application) Act. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

 

As a result of all of the above, holders of our shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.

 

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British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law which are penal in nature; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction under the common law without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide some protection for minority shareholders, but minority shareholders will not necessarily have recourse in all cases where they may be dissatisfied with our conduct

 

Under the laws of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constitutional documents of the company memorandum and articles of association as shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of the company. A shareholder may also bring an action under statute if he feels that the affairs of the company have been or will be carried out in a manner that is unfairly prejudicial or discriminatory or oppressive to him.

 

There are also common law rights for the protection of shareholders that may be invoked.

 

The market price for our shares has been and may continue to be volatile.

 

The market price for our shares has been and is likely to continue to be highly volatile and subject to wide fluctuations in response to factors including the following:

 

·actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;

 

·changes in financial estimates by securities research analysts;

 

·changes in the economic performance or market valuations of companies specializing in the ceramics business in China;

 

·announcements by us and our affiliates or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;

 

·addition or departure of our senior management and key personnel; and

 

·fluctuations of exchange rates between the RMB and the U.S. dollar.

 

Volatility in the price of our shares may result in shareholder litigation that could in turn result in substantial costs and a diversion of our management’s attention and resources.

 

The financial markets in the United States and other countries have experienced significant price and volume fluctuations, and market prices have been and continue to be extremely volatile. Volatility in the price of our shares may be caused by factors outside of our control and may be unrelated or disproportionate to our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.

 

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Although we paid semi-annual dividends in 2013 and 2014, the payment of any dividend is subject to the discretion of our Board of Directors and we may decide not to declare a dividend in future periods, in which case, shareholders will benefit from an investment in our shares only if those share appreciate in value.

 

We paid dividends in July 2013, January 2014, July 2014 and January 2015. The declaration and payment of cash dividends is at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities, if any, and any other financing arrangements. If we choose not to declare dividends in the future, realization of a gain on shareholders’ investments will depend on the appreciation of the price of our shares, and there is no guarantee that our shares will appreciate in value.

 

We may not be able to pay any dividends on our shares in the future due to British Virgin Islands law.

 

Under British Virgin Islands law, we may only pay dividends to our shareholders if the value of our assets exceeds our liabilities and we are able to pay our debts as they become due. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. Future dividends, if any, will be at the discretion of our board of directors, and will depend upon our results of operations, cash flows, financial condition, payment to us of cash dividends by our subsidiaries, capital needs, future prospects and other factors that our directors may deem appropriate.

 

We may need additional capital, and the sale of additional shares or equity or debt securities could result in additional dilution to our shareholders.

 

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain one or more additional credit facilities. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

 

ITEM 4.INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

Our principal PRC-based operating subsidiary, Hengda, was established on September 30, 1993 under the laws of the PRC. Hengda is a wholly foreign-owned enterprise in China.

 

Our other PRC-based operating subsidiary, Hengdali, was established on May 4, 2008 under the laws of the PRC. All of the equity interests in Hengdali are 100% owned by Hengda.

 

Stand Best was established on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on April 1, 2008 for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of Stand Best.

 

Success Winner was established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder and sole director.

 

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On June 30, 2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted by Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the same date, the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success Winner. Therefore, Mr. Wong Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand Best and in turn, 100% of Hengda.

 

CHAC was incorporated in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business that had its principal operations in Asia, with a focus on potential acquisition targets in China.

 

Pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, and as part of the same integrated transaction, China Ceramics acquired all of the outstanding securities of Success Winner.

 

Prior to China Ceramics’ acquisition of Success Winner, neither CHAC nor China Ceramics had any operations.

 

On November 19, 2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi Province, PRC by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders to Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s operating and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB 185.5 million for the acquisition.

 

On September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials and interior and exterior decoration materials.

 

The total maximum annual production capacity from our two facilities is 72 million square meters of ceramic tiles as of December 31, 2014. However, due to current economic conditions, we are currently utilizing production facilities capable of producing 37 million square meters.

 

The following chart reflects our organizational structure as of December 31, 2014:

 

 

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China Ceramics’ History

 

China Ceramics is a British Virgin Islands limited liability company whose predecessor, CHAC, incorporated in Delaware on June 22, 2007, was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business, that has its principal operations in Asia.

 

Pre-IPO Private Placement

 

On November 21, 2007, CHAC completed a private placement of 2,750,000 warrants to Paul K. Kelly, James D. Dunning, Jr., Alan G. Hassenfeld, Gregory E. Smith, Xiao Feng, Cheng Yan Davis, Soapakij (Chris) Cheavranant and Ruby Bin Kao, collectively referred to as the founding shareholders, as a result of which CHAC received net proceeds of $2,750,000.

 

The Initial Public Offering

 

On November 21, 2007, CHAC consummated its initial public offering of 12,000,000 units. On December 14, 2007, the underwriters of CHAC’s initial public offering exercised their over-allotment option for an offering of 800,000 units. Each unit in the offering consisted of one share and one share purchase warrant. Each warrant entitled the holder to purchase from China Ceramics one share in China Ceramics at an exercise price of $7.50. CHAC’s shares and warrants started trading separately as of December 17, 2007.

 

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The Business Combination

 

Pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, and, immediately thereafter, and as part of the same integrated transaction, China Ceramics acquired all of the issued and outstanding shares of Success Winner held by its former shareholder in exchange for $10.00 and 5,743,320 shares of China Ceramics shares. In addition, 8,185,763 shares of the China Ceramics shares were placed in escrow (the “Contingent Shares”) to be released to the seller in the event certain earnings and stock price thresholds were achieved. Of the Contingent Shares, 5,185,763 Contingent Shares were released based on our achieving growth in either net earnings before tax or net earnings after tax. 3,000,000 Contingent Shares that were eligible to be released if China Ceramics shares closed at or above certain share price targets for any twenty trading days within a thirty trading day period prior to April 30, 2012 were canceled because we did not meet applicable price targets. We currently have 20,430,838 issued and outstanding shares.

 

Concurrent with the Business Combination, we redeemed and purchased an aggregate of 11,193,149 of our shares from our public stockholders for an aggregate purchase price of approximately $109.6 million (in transactions intended to assure the successful completion of the Business Combination). Such shares were voted in favor of the Business Combination and the other related proposals.

 

On November 16, 2012 all of our share purchase warrants expired and ceased to trade.

 

China Ceramics’ registered office is c/o Harneys Corporate Services Limited of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands.

 

B.Business Overview

 

Overview

 

We are a leading Chinese manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings. The ceramic tiles, sold under the “HD” or “Hengda,” “HDL” or “Hengdeli”, “Pottery Capital of Tang Dynasty”, “TOERTO” and  ”WULIQIAO” brands are available in over two thousand styles, colors and size combinations. Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling products, accounting for over 67.8% of our total revenue in 2014.

 

Ceramic tiles are widely used in the PRC as a construction material for residential and commercial buildings. Ceramic tiles are used for flooring, interior walls for decorative purposes and on exterior siding due to their resistance to temperature, extreme environments, erosion, abrasion and discoloration for extended periods of time. Citigroup Global Markets reports that the PRC government has actively promoted the construction of affordable housing by ensuring that 77% of the new land made available was allocated to those in the low-income bracket, especially in Tier II and III cities. During the 11th National People’s Congress (NPC) relating to the central government’s draft 12th Five Year Plan (2011 -2015), Premier Wen Jiabao pledged that the government will curb excessive housing price growth and provide enough affordable houses for needy residents. Premier Wen stated that, from 2011 to 2015, the country aims to build 36 million units of affordable housing covering 20 percent of the country’s households. In addition, the government recently released a statement stating that the greatest potential for expanding domestic demand and sustaining economic growth lies in urbanization. Since urbanization leads to new property development and construction, this could positively impact the Company’s business.

 

Our manufacturing facilities operated by Jinjiang Hengda Ceramics Co., Ltd. are located in Jinjiang, Fujian Province, and our manufacturing facilities operated by Jiangxi Hengdali Ceramic Materials Co., Ltd. are located in Gaoan, Jiangxi Province. Combined, these facilities currently provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, due to current economic conditions, we are currently utilizing production facilities capable of producing 37 million square meters. We currently have sixteen production lines (nine of which were utilized as of the end of 2014), with each production line optimized to manufacture specific size ranges to maximize efficiency and output.

 

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We primarily sell our products through an exclusive distributor network or directly to property developers. We have long-term relationships with our customers; most of our top ten customers in 2014 have been purchasing from us for over ten years. We have been in discussions with some large property developers in China to be their exclusive or primary provider of ceramic tiles and, although no arrangements or agreements have been entered into, we expect to enter into arrangements of that type in the foreseeable future.

 

We focus our research and development efforts on developing innovative and environmentally-friendly products. We own twenty-two utility model patents. Our stringent tile management and marketing efforts have created a strong business reputation and high brand awareness as demonstrated by us receiving numerous awards such as the “Chinese Well-Known Trademark” award from the Intermediate People’s Court of Xiangtan City and “Asia’s 500 Most Influential Brands 2012” award from the World Brand Laboratory.

 

Our Industry

 

We operate in the Chinese ceramic tile industry which is fragmented, highly competitive and closely tied to the PRC economy. Although there is little industry data available, management believes from its knowledge of other manufactures that it is one of the largest PRC-based manufacturers of ceramic tiles.

 

In 2014, China’s gross domestic product (GDP) totaled approximately $10.4 trillion, making it the world’s second largest economy after the United States. Although 2014 GDP grew by 7.4% compared to 7.7% annual GDP growth in 2013, we believe that construction and real estate development will continue to be a key driver behind China’s GDP growth with property investment and related industries constituting a significant percentage of its GDP. Demand for ceramic tile product depends upon and directly correlates to activity in the construction and real estate development industries. The ceramic tile industry’s two primary markets in the PRC are residential construction applications and commercial construction applications.

 

We believe that China’s real estate sector has been under pressure due to speculative activities and government policies that restricted construction with the intent to rein in rising prices. However, we see some positive developments in recent reports that the government is urging local planning authorities to free up land supplies for housing development. The government recently released a statement stating that the greatest potential for expanding domestic demand and sustaining economic growth lies in urbanization. Since urbanization leads to new property development and construction, this could positively impact our business.

 

We believe that the real estate and the construction and building materials sectors continue to be vital to sustaining China’s economy growth. In order to address the challenging market environment of 2014, the Chinese government has taken various actions to stimulate real estate development and home purchases. These include the lowering of interest rates by the central bank, including a recent rate cut in late February 2015, and relaxed reserve requirements for small banks to increase lending. We believe that these actions could positively impact our business because they could help real estate developers begin new projects by lowering their cost of borrowing as well as improving mortgage terms for borrowers, which would make home purchases more affordable. Regulatory easing has also included a loosening of home purchase restrictions in second and third tier cities intended to moderate pricing and increase demand. This could be of direct benefit to the Company since its marketing strategies have historically focused on real estate projects in second and third tier cities.

 

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Commencing in the fourth quarter of 2012, we experienced challenging market conditions in China’s real estate and construction markets which resulted in a marked decrease in our sales volume of our ceramic tile products for the quarter. Beginning in December 2012, we began reducing the selling price of our ceramic tile products to be competitive in the market and to maintain market share. For fiscal 2013, our full year revenue was was down 35.4% as compared to fiscal 2012 full year revenue, resulting from a 24.8% decrease in the sales volume of our ceramic tiles and a 14.1% decline in our average selling price. However, in fiscal 2014, we believe that we have begun to emerge from the sector downturn that occurred in late 2012 due to challenging macroeconomic conditions. For fiscal 2014, our full year revenue was up 11.2% as compared to fiscal 2013 resulting from a 1.2% increase in the sales volume of our ceramic tiles and a 9.7% increase in our average selling price.

 

Key Factors Affecting the Chinese Ceramic Tile Industry

 

The overall performance of the ceramic tile industry is influenced by consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy and the recent restriction policy on the purchase of property. Demand for our ceramic tile products in the PRC heavily depends on the following economic factors and government policies designed to drive growth in the construction and real estate development sectors of the PRC economy.

 

Urbanization

 

Over the last twenty years, China has experienced rapid urbanization due to the increasingly limited capacity of rural areas to provide adequate economic support for a large agrarian population, the increasing disparity in disposable incomes between rural and urban dwellers and the easing of restrictions which historically limited rural to urban migration from rural areas to towns and cities. The development of an industrial base and service sector in urban areas has also driven large labor pools with a broad range of skills to urban areas. It is estimated that China’s urban population will expand from 572 million in 2005 to 926 million in 2025 and hit the one billion mark by 2030. In 20 years, China’s cities will have added 350 million people to its urban population — more than the entire population of the United States today. As a result of the urbanization trend and the associated need to expand an underdeveloped infrastructure to accommodate and house such growth, we believe that commercial and residential construction will expand measurably in future years, thereby creating additional demand for our products.

 

Potential of Tier II and III cities

 

Much of the growth in China’s GDP is being driven by economic activity in Tier II and Tier III cities, such as Chengdu, Chongqing, and Tianjin, which commonly have populations that exceed 10 million individuals who often live in dwellings that do not meet modern standards. According to Jones Lang LaSalle, Tier I cities will account for only 10% of China’s commercial real estate activities by 2020, which highlights the attractive commercial development opportunities in Tier II and III cities. The economic impact of this trend is being felt across China’s Tier II and Tier III cities as the upswing in new residential and commercial construction projects and renovations is generating new demand for construction materials.

 

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Importance of distributors

 

The majority of exterior ceramic tile manufacturers do not have sufficient resources to provide their own sales coverage nationwide and rely heavily on local distributors with roughly 82% of total sales pushed through such channels. As competition has intensified, many manufacturers have started to bid directly to real-estate developers for large construction projects. Direct sales represented 18%, 15% and 18% of total sales in 2014, 2013 and 2012, respectively and market participants expect this share will continue to increase, placing a premium on a manufacturer’s internal sales force while requiring product lines with greater flexibility to meet direct customer demands.

 

Industry and Product Offerings

 

There are two product segments within the ceramic tile industry: exterior and interior.

 

Exterior ceramic tiles

 

Exterior ceramic tile is mainly used as a decorative and protective component on building exteriors. Unlike other types of tiles, exterior ceramic tile must endure harsh environmental conditions and typically is manufactured to be water/dirt-resistant, non-corrosive and energy efficient. In addition, exterior ceramic tiles have other demands that interior ceramic tiles do not always have, including mandatory expansion joints, moisture considerations and thermal demands. Depending on the ultimate use of the ceramic tile and customer preferences, exterior ceramic tiles are often manufactured with customized glazing, coloring and other design and aesthetic features.

 

Interior ceramic tiles

 

Interior ceramic tiles are mainly used for decorative purposes on walls and floors in kitchens and bathrooms. Interior ceramic tiles are differentiated by design, style and perceived quality. Within China, interior ceramic tiles are typically purchased by residential owners or renovation contractors rather than property developers.

 

The manufacturing process is similar for both segments, however the distribution channels are different. Interior ceramic tiles are sold through retail stores and directly to contractors or residential owners. Exterior ceramic tiles are sold through distributors or directly to large property developers. Due to the higher cost distribution chain and typically smaller order sizes, profit margins are generally less within the interior ceramic tile industry.

 

Future Product Trends

 

As the ceramic tile industry in the PRC matures, builders are demanding construction materials that reduce building weight, making it possible to use light building structures and accelerate the speed of construction. Government policies meant to address energy efficiency are promoting the use of innovative wall materials, particularly those performing well in heat preservation and insulation and that are light in weight, and manufactured utilizing waste materials, less energy and fewer raw materials. In an effort to differentiate their products and meet government policies, ceramic tile manufacturers are increasingly focusing on research and development efforts.

 

China Ceramics’ Products

 

We sell 100% exterior wall ceramic tiles.  We produce five types of ceramic tiles:

 

Porcelain tiles:  Porcelain tiles are fired at extreme temperatures and are therefore stronger and harder than other types of ceramic tiles. The material and the color is the same throughout and porcelain tiles are extremely durable. Although porcelain tiles have a matte surface, they absorb less water than other ceramic tiles, and as such, they are a superior solution for exterior tiling where there is frequent exposure to moisture.

 

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Glazed tiles:  Glazed tiles have a glossy finish and color patterns may be added to the exterior surface of the tile. The glaze does not go beyond the exterior surface of the tile and the interior color will show if the tile is chipped. Although glazed tiles are less water-resistant than matte porcelain tiles, they are easier to clean due to their glossy surface.

 

Glazed porcelain tiles:  Glazed porcelain tiles combine the advantages of porcelain tiles and glazed tiles, thus enabling the tiles to have a porcelain body with a stain-proof and glossy finish.

 

Rustic tiles:  Rustic tiles have greater versatility in their design as textures and colors can be added to their exterior surfaces and therefore can be used in more decorative situations. In addition to being used on exterior walls, rustic tiles are also used for interior walls and flooring.

 

Polished glazed tiles: Polished glazed tiles can be manufactured in differing sizes according to customer specifications, with the largest sized tiles measuring 800 mm by 800 mm.

 

We can produce over 2,000 different combinations of products, colors, textures and sizes to meet the various demands of our customers.

 

Our Competitive Strengths

 

We believe the following competitive strengths will enable us to compete in the ceramic tile industry in China:

 

Brand Recognition

 

We believe that the “Hengda,” “HD,” “Hengdeli,” “HDL,”, “Pottery Capital of Tang Dynasty”, “TOERTO” and “WULIQIAO” brands are well recognized and highly regarded in markets where our products are sold. Before April 13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and was licensed the exclusive right to use WULIQIAO during the term of that trademark, which expires on January 27, 2020. On April 13, 2011, WULIQIAO was transferred to Hengdali. In 2005, the brands “Hengda” and “HD” were each certified as a Fujian Well-Known Trademark by the Fujian Well-Known Trademark Award Commission and recognized as a “Chinese Well-known Trademark” in 2005 by the Intermediate People’s Court of Xiangtan City. Since 2012, we have been recognized with the “Asia’s 500 Most Influential Brands” award from the World Brand Laboratory. Our products are selected for inclusion in strategic and high-profile projects such as the 16th Asian Games, the 11th National Chinese Games Village and the Chinese Academy of Sciences.

 

Focus on Tier II and Tier III Cities

 

Because of recent efforts by the PRC government to tighten monetary policy and constrain real estate prices in the “Tier-I” cities such as Beijing, Shanghai, Shenzhen, and Guangzhou, we believe the outlook for our business has improved, given our concentration in Tier-II and Tier-III cities. Approximately 5.91% of our revenue in the year ended December 31, 2014 was from sales of our products for use in projects in Tier-I cities, and we expect any weakness in the Tier-I cities to be offset by continued demand growth in the Tier-II and Tier-III cities, driven by urbanization trends as well as by the PRC government’s commitment to low-income housing.

 

Long-Term Sales Relationships

 

We have established an extensive distributor network and long term customer relationships, where most of Hengda’s top ten customers in 2014 have been purchasing from us for over 10 years each.

 

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Experienced Management Team

 

Our experienced, professional and dedicated management team brings a wealth of knowledge to our day-to-day operations and provides us with strategic direction. Our Chairman, Chief Executive Officer and founder, Huang Jia Dong, has more than 20 years of experience in the ceramics industry and is Vice-Chairman of the Fujian Province Ceramic Industry Association. The other members of the senior management team have many years of experience in the ceramic industry.

 

Modern, environmentally friendly, and efficient manufacturing capabilities

 

We have modern manufacturing facilities. Our Hengda facility received an ISO 9001:2000 accreditation, an international standard that acknowledged our quality control process. Our employees are required to undergo internal training regarding quality control policies, targets and procedures, as well as production and processing techniques.

 

We upgraded our Hengda production lines to recover and/or reuse waste water, waste dust, exhaust and kiln after-heat in 2007, which reduced our energy usage and energy costs. Our new Hengdali production lines were also built using new equipment that incorporates recovery methods for recycling waste water, waste dust, exhaust and kiln after-heat that operate at a higher efficiency rate. We received an Energy Conservation Advance Enterprise Award in 2008 from the Jinjiang City Government.

 

Focus on Research and Development

 

We have devoted substantial resources to establishing research and development capabilities in an effort to improve our products and diversify our product mix. Our R&D team has also focused on environmentally friendly products like the ultra-thin tile, which in addition to using fewer raw materials can reduce load-bearing stress and can provide enhanced insulating capabilities, and developed over 2000 types of different product combinations. As of the date of this Annual Report, we own eighteen utility model patents. “Utility model patents” means any new technical solution relating to the shape, the structure, or their combination, of a product, which is fit for practical use. In addition, we were awarded a “High-tech Enterprise Certificate” in 2007 from Fujian Provincial Department of Science and Technology, affirming our innovations in the industry. As of December 31, 2014, our research and development team includes 20 employees and focuses on new products as well as developing energy and resource efficient production methods.

 

Strategic Location within the PRC

 

We are located in Jinjiang and Gaoan. The Jinjiang region is an established ceramic and construction material hub in the PRC, and the Gaoan region is a developing ceramic production area supported by the local government. Both of these areas are located near the raw materials required to produce ceramic tiles. As distributors and direct customers come to these areas to procure construction materials for sale, construction projects or export, these locations provide us a regular flow of customers and demand. These centralized industry locations allow us to respond quickly to customer demands and react rapidly to emerging market trends. The proximity and ease of access to major ports and transportation infrastructure in both of these regions enables us to decrease transportation and logistics costs.

 

Our Growth Strategy

 

We intend to further strengthen our position as a leading manufacturer of ceramic tiles in China by implementing the following strategies:

 

Broadening Our Distribution Network

 

We sell our products mainly to distributors located in major Tier-I cities such as Shanghai and Beijing and Tier-II cities such as Tianjin, Wuhan, Chengdu and Shenyang. We plan to establish and/or increase our presence in Tier-II and Tier-III cities in provinces such as Zhejiang, Anhui, Heilongjiang, Guizhou, Henan, Hebei, Shandong, Shanxi, Shaanxi, and Yunnan.

 

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We believe that our Hengdali production facility in Gaoan will better position us to expand into new markets and reach additional end customers as transportation and logistical costs of delivering products to these areas will be reduced.

 

Evaluating Opportunities to Increase Exports

 

Currently, we export approximately 7% of our products through PRC trading companies. We intend to increase the exported volume of our products with additional PRC trading companies and by promoting our products in regional and international trade shows with a focus on direct selling efforts to property developers in the PRC.

 

Pursuing Selective Acquisition Opportunities

 

We will explore business combinations that broaden our product line, expand our customer base and allow us to penetrate new geographic regions. Our management believes that it has sufficient expertise to find and acquire suitable ceramic production facilities and/or companies to increase our scale and geographic diversification within the PRC. Our management intends to only pursue acquisitions where it believes that we will be able to continue to provide cost competitive, high quality ceramic tiles to our customers.

 

Further Enhancing Our Brand Awareness

 

We plan to enhance awareness of the “Hengda” or “HD,” “HDL” or “Hengdeli,” “TOERTO” and “WULIQIAO” brands in the PRC exterior ceramic tile industry. Hengda produces our “Hengda” or “HD” brands, which are marketed toward the high-end market. Hengdali produces our “HDL” or “Hengdeli” brands, which are marketed to the mid-level market, “TOERTO” brand, which is a specialized brand for our large-sized rustic tiles and “WULIQIAO” brand, which is a specialized brand for oriental pattern large-sized rustic tiles. WULIQIAO is a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and has been licensed the exclusive right to use WULIQIAO during the term of that trademark. Our branding strategy is to reach a larger customer base with a wide spectrum of product offerings. We plan on strengthening our brands by marketing our products to property developers and the construction industry, partnering with local distributors, attending national fairs and promoting our products through inclusion in strategic high-profile projects.

 

Developing Advanced Products That Meet Evolving Building Construction Requirements

 

We strive to develop new products that address market demand for advanced building materials that meet or exceed evolving government policies for energy efficiency. Our research and development efforts are focused on developing tiles which:

 

·Reduce raw materials and energy consumption in the production process;

 

·Have a density less than half of other tiles;

 

·Reduce load bearing stress on exterior walls of buildings and tile shedding;

 

·Recycle our by-products and limit waste output in our production process;

 

·Utilize a honeycomb structure which optimizes insulation performance for new products, such as our light-weight product lines;

 

·Have higher standards for water resistance; and

 

·Are easier to attach to exterior walls.

 

We will continue to invest in research and development to maintain our competitive position in the industry.

 

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Production Process and Facilities

 

A typical production line for ceramic tiles is comprised of preparation equipment (which typically includes a miller and a spray dryer), a press (which is used for shaping raw ceramic material), a glazing line (used to supply glazed materials to the pressed tiles), a kiln (used to harden the soft mixture of clay and minerals into a hard ceramic body by subjecting the mixture to high temperature) and packaging.

 

The following chart sets out the major steps involved in the production process:

 

 

The procedures involved in the production of ceramic tiles are summarized below:

 

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(i)Inspecting

 

Raw materials for ceramic products consist mainly of clay (comprised of inorganic materials such as kaolin, flint and feldspar) obtained mostly from areas adjacent to our facilities, such as Dehua county of Quanzhou city and the Fujian province. Raw materials are inspected by quality control staff upon receipt. Batch calculations that take into consideration both physical properties and chemical compositions of the raw materials are performed to ensure that the right amounts are mixed.

 

(ii)Mixing and Grinding

 

After stringent checks on the quality of the clay and weighing, the raw material department mixes the clay as determined during inspection. The mixture is then sent to a ball mill where water is added to form a slurry for finer grinding. This process takes approximately 12 hours to complete. The slurry is then filtered and metallic particles are removed magnetically. The slurry is inspected at this stage for density, flow speed and water ratio. Compared with many competitors who use stone ball millers, we use aluminum ball millers to grind materials. Aluminum ball millers have a higher initial cost, but have higher grinding speed and can better process stone chips existing in the slurry. The slurry is then moved to a large slurry pool. Based on the production schedule, portions of the slurry may be moved to smaller slurry pools where coloring materials can be added. The mixture in smaller slurry pools are churned for approximately 24 hours to keep quality and color consistent in the end product.

 

(iii)Spray Drying

 

A spray dryer is then used to remove most of the water content in the slurry to obtain granules with the required moisture level for processing. The slurry is pumped into an atomizer, consisting of a rapidly rotating disk or nozzle where droplets are formed. The droplets of the slurry spray are then dried by a rising hot air column, forming small free-flowing granules of a standard size and specific moisture content which is used in the next stage. The stream of gases used to dry the slurry can be at temperatures as high as 1,100°C. The granules are then moved to and held in steel containers called hoppers for over 24 hours to ensure consistency and uniformity of granule size and color.

 

(iv)Molding

 

The granules flow from a hopper into the mold die where they are compressed by steel plungers and then ejected by the bottom plunger in varying sizes based on specifications. The automated presses used operate at pressures as high as 1,600 tons per square meter. The ceramic bisque, a shaped non-fired ceramic tile, is then passed through to the dryer to remove most of the remaining water content present in preparation for the firing and/or glazing stages. The tiles are fed into the dryer and conveyed horizontally on rollers, at temperatures of 250°C for approximately 15 to 25 minutes based on tile type.

 

(v)Glazing

 

Glazing involves applying one or more coats of glaze, comprised mainly of silica and other coloring agents such as iron, chromium, cobalt or manganese, onto the tile surface. The dried ceramic bisque is then sent to the glazing station where a design and/or color is added. The glaze concentration and glazing quantity is controlled by computers to avoid chromatic aberration and lack of uniformity. Not all products, such as porcelain tiles, require glazing.

 

(vi)Firing

 

After molding and/or glazing, the ceramic bisque is fired in a kiln. Typically, the temperature in a kiln is about 1,200°C and the firing process takes less than one hour. The entire firing process is monitored and controlled by computers. We currently have twelve firing lines, nine located in the Hengda facility and three located at the Hengdali facility.

 

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(vii)Packaging

 

After the firing process, tiles are inspected for quality. Tiles which pass inspection are packaged and moved to the storage facility.

 

Quality Control & Assurance

 

The quality of our products is critical to our continued growth and success. In July 2002, our Hengda facility received ISO 9001:2000 accreditation, an international certification certificate, acknowledging our quality control process. Quality control procedures begin at the receipt of raw materials and continue throughout the manufacturing process ending with a final quality check prior to packaging. Our employees are required to undergo internal training regarding our quality control policies, targets and procedures, as well as production and processing techniques. As of December 31, 2014, our quality assurance team consisted of 84 members.

 

Notable Awards & Certificates

 

We have received numerous awards and certificates for our branding, product quality and R&D achievements. Select awards include:

 

Year Initially
Received

  

Award & Certificate Name

  

Issuer

2002   ISO 9001:2000 Quality Management System Certificate   China Certification Center for Quality Mark
2005   ISO 14001:2004 Environmental Management Standards Certificate   Fujian Branch of Beijing World Standards Certification Centre
2005   Fujian Well-known Trademark   Fujian Well-known Trademark Award Commission
2005   Chinese Well-known Trademark   Intermediate People’s Court of Xiangtan City
2006   Inspection Exempted Products Certificate   National Bureau of Quality and Technical Supervision
2007   High-tech Enterprise Certificate   Fujian Provincial Department of Science and Technology
2008   Energy Conservation Advanced Enterprise   Jinjiang City Government
2009   Fujian 100 Important Industrial Enterprise   Fujian Economic and Trading Commission
2010   Asia’s 500 Most Influential Brands 2010   World Brand Laboratory
2010   Fujian’s Top 300 Enterprises   Fujian Enterprise Evaluation Center and Fujian Enterprise Evaluation Association
2011   China’s 500 Most Valuable Brands   World Brand Laboratory
2011   Top 100 Fastest Growing Enterprises for China Building Material   China Building Materials Enterprise Management Association
2011   Top 500 Enterprise in China Building Material   China Building Materials Enterprise Management Association
2011   Customer Preferred Top 10 Brand   China International Nameplate Development Association
2012   Asia’s 500 Most Influential Brands 2012   World Brand Laboratory
2013   China’s 500 Most Valuable Brands   World Brand Laboratory
2013   Asia’s 500 Most Influential Brands 2013   World Brand Laboratory
2014   China’s 500 Most Valuable Brands   World Brand Laboratory

 

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Customers, Sales & Marketing

 

We primarily sell our products through an exclusive distributor network or directly to property developers. Distributors are located in major cities such as Shanghai, Beijing, and Shenyang and second and third tier cities such as Chengdu, Haikou, Hefei, Tianjin, Wuhan and other rural areas in the PRC. We have long-term relationships with many of our customers; most of our top ten customers in 2014 have been purchasing from us for several years.

 

The following table sets forth revenues by geographic market and the related percentage for the years ended 2012, 2013 and 2014:

 

   2012   2013   2014 
Geographic Market  RMB’000   Percentage   RMB’000   Percentage   RMB’000   Percentage 
PRC   1,350,517    93.5%   873,150    93.6%   966,255    93.2%
Japan   10,850    0.8%   7,421    0.8%   8,869    0.9%
Burma   8,453    0.6%   6,179    0.7%   7,384    0.7%
India   9,463    0.7%   5,944    0.7%   7,103    0.7%
Korea   8,201    0.6%   5,683    0.6%   6,792    0.7%
Thailand   8,958    0.6%   5,552    0.6%   6,634    0.6%
Hong Kong   8,706    0.6%   5,483    0.6%   6,552    0.6%
Turkey   5,678    0.4%   3,890    0.4%   4,649    0.4%
Spain   6,561    0.5%   3,886    0.4%   4,644    0.4%
South Africa   6,687    0.5%   3,794    0.4%   4,534    0.4%
Sierra Leone   5,173    0.3%   2,769    0.3%   3,309    0.3%
Ghana   5,299    0.3%   2,696    0.3%   3,221    0.3%
Russia   3,154    0.2%   2,321    0.2%   2,774    0.3%
Morocco   4,037    0.2%   2,266    0.2%   2,708    0.3%
Great Britain   3,154    0.2%   1,860    0.2%   2,223    0.2%
Total   1,444,891    100%   932,894    100%   1,037,651    100%

 

Our top ten customersare set forth in the table below, and none of these customers individually accounted for more than 10% of our total revenue for the years ended December 31, 2012, 2013 and 2014.

 

The following table sets forth revenue for our major customers and the related percentage of our net revenue for the years 2012, 2013 and 2014.

 

   2012   2013   2014 
Customer Name  RMB’000   Percentage   RMB’000   Percentage   RMB’000   Percentage 
Foshan City Jundian Ceramics Co., Ltd.   139,184    9.6%   69,113    7.4%   68,806    6.6%
Fuzhou Chuanpin Materials Co., Ltd.   30,779    2.1%   28,487    3.1%   37,423    3.6%
Chengdu City Dehui Construction Materials Co., Ltd.   28,257    2.0%   26,229    2.8%   34,995    3.4%
Liuzhou City Shengquanda Trading Co., Ltd.   28,994    2.0%   28,179    3.0%   33,040    3.2%
Shangrao New Fangyuan Materials Co., Ltd.   27,941    1.9%   24,748    2.7%   32,980    3.2%
Kunming Minhengda Trading Co., Ltd.   26,032    1.8%   21,992    2.4%   31,767    3.1%
Sichuan Heli Construction Materials Co., Ltd.   -    -    -    -    31,691    3.1%
Shanghai Qisen Construction Materials Co., Ltd.   -    -    -    -    29,758    2.9%
Jiangxi Zhongshi Industry Co., Ltd.   28,599    2.0%   27,803    3.0%   27,989    2.7%
Nanjing Huli Construction Materials Co., Ltd.   -    -    -    -    27,906    2.7%
Chaozhou Chenqiao Jianxing Construction Materials Co., Ltd.   27,392    1.9%   25,211    2.7%   -    - 
Xuzhou Haige Material Co., Ltd   26,739    1.9%   23,686    2.5%   -    - 
Hubei Wanshi Trading Co., Ltd   25,308    1.8%   23,136    2.5%   -    - 

 

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Our business and profitability is not materially dependent on any industrial, commercial or financial contract with any of our customers. None of our directors or executive officers or their respective affiliates has any interest, direct or indirect, in any of our customers.

 

Sales and Marketing

 

The sales and marketing department is responsible for formulating sales policies and pricing based on market analysis, surveys and forecasts, developing and implementing our sales and marketing campaigns, and promoting our products and brand. Additionally, our sales department is responsible for cultivating new customers and business relationships, as well as servicing existing accounts.

 

We participate in a variety of sales and marketing activities including trade shows, in-house sales and marketing seminars, factory tours, outdoor advertising, B2B catalogs and customer calls. We believe that these techniques allow us to gather and better understand customers’ needs and requirements and to obtain feedback on our products and services and intend to continue utilizing these techniques.

 

In the future, we intend to participate in international trade fairs and seminars from time to time to promote our brand and products, and to establish a network with industry professionals outside the PRC. To augment our plan to expand our markets internationally, our products will also be advertised on and available to purchase on the Internet. As of December 31, 2014, our Sales and Marketing Department had 40 employees.

 

Backlog

 

We typically receive orders from customers two months in advance of production on a rolling basis. We enter into a dealership agreement with customers, and a sales or purchase contract each time a customer places an order. If a customer makes any changes to an order after we have used any raw materials in fulfilling the order, the customer bears the losses. Once we have delivered the products to the customer and the customer has examined and accepted the products, we provide no quality guarantees. We confirm amounts payable with each customer on a monthly basis. The products typically must be delivered to customers within 90 days of receipt of the sales order, and the customers typically must pay for the products within 120 to 150 days of delivery.

 

As of December 31, 2014, our backlog was RMB 137.0 million ($22.1 million) which represents approximately the next two months of revenue at the time, compared to a backlog of approximately RMB 136.6 million as of December 31, 2013.

 

Major Suppliers & Raw Materials

 

Our major suppliers will usually deliver raw materials within 1-2 months after they have received our purchase order. The typical credit term from our major suppliers is from 1 to 4 months after the raw materials have been delivered.

 

Clay, coal and natural gas are the main raw materials and energy sources required to manufacture ceramic tiles. We purchase clay and coal from at least two independent suppliers. Other major sourced materials include coloring and packaging. We are not dependent on any one of our PRC based suppliers as we are able to source raw materials from alternative vendors should the need arise.

 

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Our suppliers are selected by our purchasing department and are assessed on criteria such as the quality of materials supplied, duration of their business relationship with us, pricing, delivery reliability and response time to orders placed by us. We have sufficient raw materials on hand to support, on average, three weeks of production at any point in time to minimize any potential production delays that could arise due to a delay in raw material delivery.

 

We have not experienced significant production disruptions due to a supply shortage from our suppliers, nor have we had a major dispute with a supplier.

 

Our major suppliers for the last three years are set forth in the table below, and except for Jinjiang Xinao Gas Company Limited and Foshan City Sanshui Baoligao Inorganic Materials Co., Ltd., no suppliers accounted for more than 10% of our total purchases of raw materials and energy sources for the years ended December 31, 2012, 2013 and 2014. Our business or profitability is not materially dependent on any industrial, commercial or financial contract with any of our suppliers.

 

The following chart lists our major suppliers and the related percentage of our total purchases of raw materials and energy sources in fiscal years 2012, 2013 and 2014:

 

      2012   2013   2014 
Supplier Name  Type  RMB’000   Percentage   RMB’000   Percentage   RMB’000   Percentage 
Jinjiang Xinao Gas Company Limited  Gas   -    -    -    -    89,493    13.34%
Foshan City Sanshui Baoligao Inorganic Materials Co., Ltd.  Color   32,404    4.40%   64,848    10.51%   82,578    12.31%
Fengxin Huafeng Ceramic Co., Ltd.  Clay   37,125    5.04%   30,116    4.88%   48,465    7.22%
Quanzhou Like Ceramic Materials Co., Ltd.  Color   32,805    4.46%   36,770    5.96%   48,210    7.19%
Foshan City Nanhai Huaxiong  Ceramic Materials Co., Ltd.  Color   -    -    33,623    5.45%   44,427    6.62%
Foshan City Sanshui Golden Eagle Inorganic Materials Co., Ltd.  Color   40,058    5.44%   26,325    4.27%   39,090    5.83%
Foshan City Nanhai Zhongtai Glaze Production Plant  Color   45,015    6.12%   38,323    6.21%   35,944    5.36%
Yongchun Junjie Mining Co., Ltd.  Coal   36,207    4.92%   22,455    3.64%   33,942    5.06%
Jiangxi Jinanyuntong Transportation Co., Ltd  Coal   -    -    -    -    29,248    4.36%
Xinyu City Yanhua Industrial Co., Ltd.  Clay   24,671    3.35%   32,353    5.24%   28,868    4.30%

 

None of our officers or directors or their respective affiliates has any interest, direct or indirect, in any of the above major suppliers. There are no arrangements or understanding with any suppliers pursuant to which any of our directors and executive officers were appointed.

 

Research and Development

 

We have devoted substantial resources to establishing research and development capabilities in an effort to improve our products and diversify our product mix. Our research and development team focuses on new products as well as developing energy and resource efficient production methods.

 

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We focus our research and development efforts on the following:

 

·Expanding and improving production capacity;

 

·Improving and developing new production and processing techniques;

 

·Improving the use and selection of raw materials to lower costs; and

 

·Developing new products and designs to address changing market demands.

 

Our research and development costs were approximately RMB 1.2 million, RMB 1.1 million and RMB 1.3 million ($0.2 million) for fiscal years 2012, 2013 and 2014. From time to time, we may enter into collaboration with other research institutes to develop new products or improve our production process. As of December 31, 2014, our R&D department had 20 employees.

 

Competition

 

We face intense competition from our existing competitors and new market entrants. Our primary competitors are usually privately owned companies that are located mainly in the PRC. Our principal competitors are Zhuhai White Rabbit Ceramics Co., Ltd, Foshan Shiwan Yulong Ceramics Co., Ltd, Jinjiang Haoyuan Ceramics, Co., Ltd, Jinjiang Wanli Ceramics Co., Ltd, Jinjiang Tengda Ceramics Co., Ltd and Jinjiang Haoshan Construction Materials Co., Ltd. We compete primarily based on product quality, brand recognition, and an extensive distributor network.

 

Intellectual Property

 

We protect our intellectual property primarily through a mix of patent and trademark registrations.

 

Registered Trademarks

 

Our brand name distinguishes our products and promotes consumer awareness of our products.

 

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We have registered the following trademarks in the PRC:

 

Trademark   Class/Products   Validity Term   Registration No.
             
  19/ Tile, ceramic tile and wave pattern tile   From February 21, 2012 to February 20, 2022   1716827
             
  19/ Tile; non-metallic tile; ceramic tile; non-metallic wall tile for constructional use; wave pattern tile; glass mosaic; non-metallic floor tile   From March 28, 2009 to March 27, 2019   4971248
             
  19/ Tile; ceramic tile; wave pattern tile; non-metallic tile for constructional use; marble; manual stone; terrazzo; glass mosaic   From September 14, 2006 to September 13, 2016   3893819
             
  19/ Tile; non-metallic tile;  ceramic tile; glass mosaic;  non-metallic tile for constructional use; non-metallic construction material; marble; granite; manual stone.   From October 21, 2010 to October 20, 2020   7543650
             
  19/ Tile; non-metallic tile; non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic ground tile; glass mosaic; plaster; cement; concrete building unit.   From May 14, 2011 to May 13, 2021   8289754
             
  19/ Tile; non-metallic tile; non-metallic tile for constructional use; non-metallic wall tile for constructional use; non-metallic floor tile; non-metallic ground tile; glass mosaic; plaster; cement; concrete building unit.   From May 14, 2011 to May 13, 2021   8289921
             
  19/ Tile, ceramic tile, asbestos cement tile, glass mosaic, non-metallic tile, non-metallic tile for constructional use, fireclay, firebrick, tile, ceramic kiln furniture.   From April 13, 2011 to January 27, 2020   1357830

 

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Before April 13, 2011, WULIQIAO was a trademark owned by Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. for Class 19 (Products: tile, ceramic tile, asbestos cement tile, glass mosaic, non-metallic tile, non-metallic tile for constructional use, fireclay, firebrick, tile, ceramic kiln furniture). Hengda signed a Trademark Licensing Contract with Fujian Province Jinjiang City Hengda Construction Materials Co., Ltd. and was licensed the exclusive right to use WULIQIAO during the terms of that trademark, which expires on January 27, 2020. Since April 13, 2011, WULIQIAO has been transferred to Hengdali, according to Certificate of Approved Transference of Trademark issued on April 13, 2011 by Trademark Office of the State Administration for Industry & Commerce of the P.R. China.

 

Patents

 

We currently own twenty two utility model patents in the PRC for exterior wall tiles, which were applied for in November of 2007, July of 2011 and November of 2012 respectively. A “utility model patent” is a new technical solution relating to the shape, the structure, or their combination, of a product, which is fit for practical use. Utility model patents have a ten year term from the application date.

 

Except as disclosed above, as of December 31, 2014, our business or profitability is not materially dependent on any other trademarks, copyrights, registered designs, patents, grant of licenses from third parties, new manufacturing processes or other intellectual property rights.

 

Environmental

 

We are subject to various environmental regulations with respect to noise and air pollution and discharge of hazardous materials. We are also subject to periodic inspection. We obtained a Temporary Pollutant Discharge Permit for our Hengda production facility, which will expire on April 27, 2015, and we are currently in the process of applying for the renewal of the permit. The permit is subject to annual renewal. We are currently in the process of applying for a Pollutant Discharge Permit for our Hengdali production facility. We are not subject to any pending actions of alleged violations of applicable PRC environmental laws. If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency.

 

Legal Proceedings

 

On June 6, 2014, a putative class action complaint (the “Pollock Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Robert Pollock, Individually and On Behalf Of All Others Similarly Situated v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng, Shen Cheng Liang, Jianwei Liu, And China Ceramics Co., Ltd. (Case No. 14-cv-4100).

 

On June 16, 2014, a putative class action complaint (the “Artinoff Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Roger Artinoff, Individually and On Behalf Of All Others Similarly Situated v. China Ceramics Co. Ltd., Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky And Su Wei Feng. (Case No. 14-cv-4312).

 

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On July 2, 2014, a putative class action complaint (the “Finlayson Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, and claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Richard Finlayson, Individually and On Behalf Of All Others Similarly Situated v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng, Shen Cheng Liang, Jianwei Liu, and China Ceramics Co., Ltd. (Case No. 14-cv-4997).

 

On February 6, 2015, we and the individual defendants reached an agreement in principle to settle the above-described cases as against all defendants and us in consideration of the payment by us of $850,000, consisting of a combination of cash and our common stock. The settlement is subject to the execution of a mutually acceptable settlement agreement and the approval of the settlement by the Court.

 

Seasonality

 

The second and third calendar quarters have been the peak season of the property developing industry, and, therefore, our quarterly sales are usually highest from May to September compared to the rest of the year. We have lower sales between the months of January and March due to the effects of cold weather and the PRC Spring Festival.

 

The seasonality information above is based on our turnover trend in the last three years and may vary slightly from year to year depending on the demand by our customers and end customers for our products. However, management believes that the seasonality information for the last three years is representative of the seasonality trend going forward.

 

Governmental Regulations

 

Environmental Protection Regulations

 

In accordance with the PRC Environmental Protection Law adopted on December 26, 1989, the Administration Supervisory Department of Environmental Protection of the State Council sets the national guidelines for the discharge of pollutants. The People’s Governments of provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants within their own provinces or districts in the event that the national guidelines are inadequate. A company which causes environmental pollution and discharges other polluting materials which endanger the public should implement environmental protection methods and procedures into their business operations. This may be achieved by setting up a system of accountability within the company’s business structure for environmental protection, adopting effective procedures to prevent environmental hazards such as waste gases, water and residues, dust powder, radioactive materials and noise arising from production, construction and other activities from polluting and endangering the environment. The environmental protection system and procedures should be implemented simultaneously with the commencement of and during the operation of construction, production and other activities undertaken by the company. Any company which discharges environmental pollutants should report and register such discharge with the Administration Supervisory Department of Environmental Protection and pay any fines imposed for the discharge. A fee may also be imposed on the company for the cost of any work required to restore the environment to its original state. Companies which have caused severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within a prescribed time limit. If a company fails to report and/or register the environmental pollution it caused, it will receive a warning or be penalized. Companies that fail to restore the environment or remedy the effects of the pollution within the prescribed time will be penalized or have their business licenses terminated. Companies that have polluted and endangered the environment must bear the responsibility for remedying the danger and effects of the pollution, as well as to compensate any losses or damages suffered as a result of such environmental pollution.

 

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Our Hengda facility obtained a Temporary Pollutant Discharge Permit (JH(2013)ZZ No. 320) granted by Jinjiang City Environmental Protection Bureau on October 28, 2013 that will expire on April 27, 2015. Hengda is currently in the process of applying for the renewal of the permit.. Hengdali is currently in the process of applying for a Pollutant Discharge Permit, and the environmental protection agency in Gaoan has accepted Hengdali’s application. If the Pollutant Discharge Permit is not issued and Hengdali discharges pollutants, Hengdali may be warned, ordered to stop discharging pollutants, and/or fined by the environmental protection agency.

 

Government Regulations Relating to Foreign Exchange Controls

 

The principal regulation governing foreign exchange in the PRC is the Foreign Currency Administration Rules and a series of implementing rules and regulations, as amended. Under these rules, the Renminbi, the PRC’s currency, is freely convertible for trade and service related foreign exchange transactions (such as normal purchases and sales of goods and services from providers in foreign countries), but not for direct investment, loan or investment in securities outside of China unless the prior approval of the State Administration for Foreign Exchange, or SAFE, of the PRC is obtained. Foreign investment enterprises, or FIEs, are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. With such registration certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. Such transactions are subject to the consent of PRC banks which are authorized by the SAFE to review basic account currency transactions. However, conversion of currency in the capital account, including capital items such as direct investment, loans and securities, still require approval of the SAFE. On November 21, 2005, the SAFE issued Circular No. 75 on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles. Circular No. 75 confirms that the use of offshore special purpose vehicles as holding companies for PRC investments are permitted, but proper foreign exchange registration applications are required to be reviewed and accepted by the SAFE.

 

Regulation of Foreign Currency Exchange

 

Foreign currency exchange in the PRC is governed by a series of regulations, including, without limitation, the Foreign Currency Administrative Rules (1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside China without the prior approval of the SAFE. Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises in China may purchase foreign exchange without the approval of the SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from the SAFE. On August 29, 2008, SAFE issued Circular No. 142 on Relevant Business Operations Issues Concerning Improving the Administration of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, with respect to the administration of conversion of foreign exchange capital contributions of FIEs into Renminbi, unless otherwise permitted by PRC laws or regulations, Renminbi converted from foreign exchange capital contributions can only be applied to activities within the approved business scope of FIEs and cannot be used for domestic equity investment or acquisitions.

 

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Regulation of Dividend Distribution

 

The principal laws and regulations in China governing distribution of dividends by foreign-invested companies include:

 

·The Sino-foreign Equity Joint Venture Law (1979), as amended;

 

·The Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended;

 

·The Sino-foreign Cooperative Enterprise Law (1988), as amended;

 

·The Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended;

 

·The Foreign Investment Enterprise Law (1986), as amended; and

 

·The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended.

 

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends.

 

Insurance

 

We have not purchased insurance coverage for product liability or third party liability and are therefore not covered or compensated by insurance in respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability. In addition, we currently do not maintain business interruption insurance. As a result, our business and prospects could be adversely affected in the event of such problems in our operations and may suffer losses that could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

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C.Organizational Structure

 

The following chart illustrates China Ceramics’ organizational structure as of December 31, 2014:

 

 

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Corporate Structure and Background

 

Our principal PRC-based operating subsidiary, Hengda, was established on September 30, 1993 under the laws of PRC. All of the equity interests in Hengda are 100% owned by Stand Best. Hengda is a wholly foreign-owned enterprise in China.

 

Hengdali was established on May 4, 2008 under the laws of PRC. All of the equity interests in Hengdali are 100% owned by Hengda.

 

Stand Best was established on January 17, 2008 under the laws of Hong Kong. Stand Best acquired the entire shareholdings of Hengda on April 1, 2008 for consideration of RMB 58,980,000. As a result of this acquisition, Hengda became the wholly owned subsidiary of Stand Best.

 

Success Winner was established on May 29, 2009 under the laws of British Virgin Islands with Mr. Wong Kung Tok as its sole shareholder and sole director.

 

On June 30, 2009, pursuant to the capitalization agreement dated June 30, 2009, Success Winner was issued the 9,999 shares allotted by Stand Best as per the capitalization exercise of a shareholder’s loan of HK$67.9 million (RMB 58.9 million). On the same date, the shareholder of Stand Best, Mr. Wong Kung Tok transferred all his shareholdings in Stand Best to Success Winner. Therefore, Mr. Wong Kung Tok, from June 30, 2009 to November 20, 2009, indirectly owned 100% of Stand Best and in turn, 100% of Hengda.

 

CHAC was incorporated in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business that had its principal operations in Asia, with a focus on potential acquisition target in China.

 

Pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, and immediately thereafter, as part of the same integrated transaction, China Ceramics acquired all of the outstanding securities of Success Winner.

 

Prior to China Ceramics’ acquisition of Success Winner, neither CHAC nor China Ceramics’ had any operations.

 

On November 19, 2009, Hengda entered into a definitive acquisition agreement to acquire a new production facility in Gaoan, Jiangxi Province, PRC by purchasing 100% of the equity interests in Hengdali. The closing of the acquisition was subject to the Gaoan City Administration for Industry and Commerce transferring the registration and business license of Hengdali from Hengdali’s former shareholders to Hengda. The transfer occurred on January 8, 2010. Hengda appointed an executive officer to take control over Hengdali’s operating and financing activities on the same day. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB 185.5 million for the acquisition, of which RMB 145.4 million was advanced to Hengdali’s former shareholders by December 31, 2009.

 

On September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian Province, and is 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials and interior and exterior decoration materials.

 

D.Property, plant and equipment

 

Together with three other companies, we jointly own six buildings comprised of one office building and five workshops in Jinjiang, Fujian Province. We recorded the related fixed assets in proportion to the amount we paid for our part of the buildings, which represents our interests in the buildings. As co-owners of these six buildings under the relevant Building Ownership Certificate, all co-owners have collective rights and obligations to the jointly-owned property under PRC law, and typically the disposal of such jointly owned property by one owner without the consent of all other owners is prohibited.

 

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The land-use rights of the co-owned six buildings are ownd by us, expire in 2055 and cover approximately 10,023 square meters. We also own land-use rights and seven buildings in Gaoan, Jiangxi Province for office buildings, workshops, warehouses, and raw material yards and staff quarters. The land-use rights for these facilities expire on various dates in 2058 through 2060 and cover an aggregate of approximately 344,324 square meters.

 

We currently lease 17 properties in Jinjiang, Fujian Province in the PRC for various uses including warehouses, office space, workshops, staff quarters and stock yards. The lease terms range from three to five years.

 

As of December 31, 2014 our Hengda production facility in Jinjiang City, Fujian Province in the PRC, had a total gross floor area of approximately 140,000 square meters and employed 1,077 production personnel and our Hengdali production facility in Gaoan, Jiangxi Province in the PRC, has a total gross floor area of approximately 344,324 square meters and employed 339 production personnel. The Hengda facility consists of eleven production lines with an annual production capacity of 42 million square meters. The Hengdali facility consists of five production lines with an annual production capacity of 30 million square meters of ceramic tiles. Historically, we have not experienced any form of disruption in our production facility.

 

Combined, these facilities currently provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, due to current economic conditions, we are currently utilizing production facilities capable of producing 37 million square meters. We currently have sixteen production lines (nine of which were utilized at the end of 2014), with each production line optimized to manufacture specific size ranges to maximize efficiency and output.

 

In 2013, we expended RMB 51.7 million ($8.5 million) for the acquisition of equipment at our Hengda and Hengdali facility to improve the production line, expended RMB 28.4 million ($4.7 million) to modify an existing production line at the Hengda facility to enable the manufacture of products that are in high demand, expended RMB 5.6 million ($0.9 million) for the acquisition of equipment at Hengda facility that replaced coal with gas as the source of Hengda’s power supply, and expended RMB 11.4 million ($1.9 million) for the interior build-out of the completed office building adjacent to the Hengdali facility.

 

During 2014, our Hengda facility was required by the local governmental entity to begin using natural gas to operate the facility, as opposed to coal. This mandated change in fuel source is part of a province-wide (and country-wide) effort to reduce pollution. This change resulted in our incurring a one-time charge of approximately RMB5.6 million ($0.9 million) in December 2013, and will increase our cost of goods produced at that facility because natural gas is a more expensive energy source than coal. Fuel source (comprising coal and natural gas) accounted for 16.4% and 15.3% of the total cost of sales in 2014 and 2013, respectively. There is no assurance that in the future our other production facilities will not be required to make similar modifications which could have similar adverse effects on our operations.

 

 

ITEM 4A.UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

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ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Overview

 

We are a British Virgin Islands limited liability company whose predecessor, CHAC, was incorporated in Delaware on June 22, 2007 and was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business that had its principal operations in Asia, with a focus on potential acquisition target in China.

 

Pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009, on November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, and, immediately thereafter, as part of the same integrated transaction, China Ceramics acquired all of the outstanding securities of Success Winner.

 

China Ceramics, through our operating subsidiaries, is a leading PRC-based manufacturer of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings. The ceramic tiles, sold under the “HD” or “Hengda”, “HDL” or “Hengdeli”, “TOERTO” and “WULIQIAO” brands are available in over two thousand styles, colors and size combinations. Currently, we have five principal product categories: (i) porcelain tiles, (ii) glazed tiles, (iii) glazed porcelain tiles, (iv) rustic tiles, and (v) polished glazed tiles. Porcelain tiles are our best-selling products, accounting for over 67.8% of our total revenue in 2014.

 

Combined, these facilities currently provide an aggregate annual maximum production capacity of approximately 72 million square meters. However, due to current economic conditions, we are currently utilizing production facilities capable of producing 37 million square meters. We currently have sixteen production lines (nine of which were utilized at the end of 2014), with each production line optimized to manufacture specific size ranges to maximize efficiency and output.

 

Basis of Presentation

 

The following discussion and analysis of our financial condition and results of operations is based on the selected financial information as of and for the years ended December 31, 2012, 2013 and 2014 and has been prepared based on the consolidated financial statements of China Ceramics Co., Ltd. and its subsidiaries. The consolidated financial statements of China Ceramics Co., Ltd. and its subsidiaries have been prepared in accordance with IFRS as issued by the International Accounting Standards Board, or “IASB.” The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments that have been measured at fair value.

 

The business combination on November 20, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in the former owner of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition, we had no operating business. Accordingly, the acquisition does not constitute a business combination for accounting purposes and is accounted for as a capital transaction. That is, the transaction is in substance a reverse recapitalization, equivalent to the issuance of equity interests by Success Winner for the net monetary assets of China Ceramics accompanied by a recapitalization. The consolidated financial statements are a continuation of the financial statements of Success Winner. The assets and liabilities of China Ceramics are recognized at their carrying amounts at the date of acquisition with a corresponding credit to the consolidated equity and no goodwill or other intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition represents the equity balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined as described above. However, the equity structure presented in the consolidated financial statements (number and values of equity instruments issued) reflects the equity structure of the legal parent, China Ceramics. Costs directly attributable to the transaction have been debited to equity to the extent of net monetary assets received.

 

Results of Operations

 

The following table sets forth our financial results for the years ended December 31, 2012, 2013 and 2014.

 

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   Year Ended December 31, 
RMB(‘000)  2012   2013   2014 
Revenue   1,444,891    932,894    1,037,651 
Cost of sales   (1,063,892)   (878,818)   (933,220)
Gross profit   380,999    54,076    104,431 
Other income   378    656    429 
Other expenses   (1,943)   (20,195)   (10,937)
Realized and unrealized fair value  Gain/(loss) on derivative financial instruments   -    3,346    (59,477)
Selling and distribution expenses   (11,378)   (9,814)   (14,251)
Administrative expenses   (29,974)   (27,565)   (29,529)
Finance costs   (9,319)   (4,201)   (4,556)
Profit/(loss) before taxation   328,763    (3,697)   (13,890)
Income tax (expense)/credit   (84,932)   1,665    (16,463)
Profit/(loss) attributable to shareholders   243,831    (2,032)   (30,353)

 

Description of Selected Income Statement Items

 

Revenue.  We generate revenue from the sales of ceramic tiles, including porcelain tiles, glazed porcelain tiles, glazed tiles, rustic tiles and polished glazed tiles, net of rebates and discounts. For the past three fiscal years, the second and third calendar quarters have been the peak season of the property developing industry, and, therefore, our quarterly sales are usually highest from May to September compared to the rest of the year. In addition, we have observed lower sales between the months of January to March. This is because property developing activities are low due to the effects of cold weather and the PRC Spring Festival. For 2014, we attribute our increased revenues and improved gross profit margin to our increased selling prices. Beginning in December 2012, we began reducing the selling price of our ceramic tile products to be competitive in the market and to maintain market share. However, we raised our selling price on all of our products on July 1, 2014.

 

Cost of sales.  Cost of sales consists of costs directly attributable to production, including the cost of clay, color materials, glaze materials, coal, salaries for staff engaged in production activity, electricity, depreciation, packing materials, and related expenses.

 

The most significant factors that directly or indirectly affect our cost of sales are as follows:

 

·Availability and price of clay;

 

·Availability and price of coal; and

 

·Availability and price of dyes; and

 

·Price of energy.

 

Clay is a key material for making ceramic tiles, and accounted for approximately 25.0% of our cost of sales in 2014. Fujian and Jiangxi Provinces, where our production facilities are located, are the largest clay production areas in China and clay supply is stable and sufficient for our production and planned production.

 

Coal and gas are our major fuel sources for making ceramic tiles. Coal and gas accounted for approximately 6.8% and 9.6%, respectively, of our cost of sales in the year ended December 31, 2014. We have long-term relationships with our coal suppliers. Prices of coal have experienced fluctuations in the past few years. During 2014, our Hengda facility was required by the local governmental entity to begin using natural gas to operate the facility. This increased our cost of goods produced at that facility because natural gas is a more expensive energy source than coal.

 

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Dyes are another key material for making ceramic tiles, and accounted for approximately 28.7% of our cost of sales in the year ended December 31, 2014. A number of dyes are used in ceramic tiles, and the prices of different dyes have experienced fluctuations in the past few years.

 

Other income and other expenses.  Other income consists of interest income. Other expenses primarily consist of the loss on disposal of equipment, foreign exchange loss and provision for litigation.

 

Selling and distribution expenses.  Selling and distribution expenses consist of payroll, traveling expenses, transportation and advertising expenses incurred by our selling and distribution team.

 

Administrative expenses.  Administrative expenses consist primarily of employee remuneration, payroll taxes and benefits, general office expenses and depreciation. We also incur additional expenses related to costs of compliance with securities laws and other regulations, including audit and legal fees and investor relations expenses.

 

Finance Costs.  Finance costs consist of interest expense on bank loans.

 

Income taxes. Our subsidiaries in the PRC are subject to the PRC Enterprise Income Tax Law, and the applicable income tax rate pursuant to such law in the years ended December 31, 2012, 2013 and 2014 is 25%.

 

Results of Operations

 

Year ended 2014 compared to the year ended 2013

 

Revenue.  The following table sets forth the breakdown of revenue, by product categories, for fiscal years 2013 and 2014:

 

   December 31, 
Revenue RMB (‘000)  2013   Percentage   2014   Percentage 
Porcelain   643,803    69.01%   703,575    67.81%
Glazed Porcelain   55,116    5.91%   44,093    4.25%
Glazed   44,841    4.81%   40,104    3.86%
Rustic   116,503    12.49%   100,512    9.69%
Polished Glazed   72,631    7.78%   149,367    14.39%
Total   932,894    100.00%   1,037,651    100.00%

 

Revenue increased by RMB 104.8 million, or 11.2%, to RMB 1,037.7 million ($167.2 million) in the year ended December 31, 2014, from RMB 932.9 million for the year ended December 31, 2013. The year-over-year increase in revenue was primarily driven by a 9.7% increase in our average selling price in 2014 as compared to 2013 (RMB 29.5 ($4.8) per square meter for 2014 compared to RMB 26.9 per square meter for 2013), which we view as reflective of our market positioning and the modestly improved macroeconomic conditions during 2014 relative to the downturn in our sector that occurred in late 2012.

 

Porcelain tiles. Revenue from porcelain tiles increased 9.3% from RMB 643.8 million for the year ended December 31, 2013 to RMB 703.6 million ($113.4 million) for the year ended December 31, 2014. The increase was primarily attributable to an increase in the average selling price. The average selling price increased by 7.4% to RMB 26.2 ($4.2) per square meter for the year ended December 31, 2014 from an average selling price of RMB 24.4 per square meter for the year ended December 31, 2013. Porcelain tiles for exterior walls are still our most popular product and have the largest market potential of all of our tiles. We expect porcelain tiles to continue to be our key product for the foreseeable future.

 

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Glazed porcelain tiles. Revenue from glazed porcelain tiles decreased 20.0% from approximately RMB 55.1 million for the year ended December 31, 2013 to RMB 44.1 million ($7.1 million) for the year ended December 31, 2014. The decrease was mainly due to a decrease in sales volume. The sales volume decreased by 25% or 0.5 million square meters to approximately 1.6 million square meters for the year ended December 31, 2014 from 2.1 million square meters for the year ended December 31, 2013. Glazed porcelain tiles accounted for 4.2% of total sales for the year ended December 2014 compared to 5.9% for the year ended December 2013.

 

Glazed tiles. Revenue from glazed tiles decreased 10.6% from RMB 44.8 million for the year ended December 31, 2013 to RMB 40.1 million ($6.5 million) for the year ended December 31, 2014. The decrease was mainly due to a decrease in sales volume. The sales volume decreased by 13.7% or 0.3 million square meters to approximately 1.8 million square meters for the year ended December 31, 2014 from 2.1 million square meters for the year ended December 31, 2013. Among our other products, glazed tiles have a lower average selling price of RMB 22.3 in 2014. Glazed porcelain tiles accounted for 3.9% of total sales for the year ended December 2014 compared to 4.8% for the year ended December 2013.

 

Rustic tiles. Revenue from rustic tiles decreased 13.7% from RMB 116.5 million for the year ended December 31, 2013 to RMB 100.5 million ($16.2 million) for the year ended December 31, 2014 which was mainly due to a decrease of sales volume. The sales volume decreased by 17.4% or 0.5 million square meters to approximately 2.2 million square meters for the year ended December 31, 2014 from 2.7 million square meters for the year ended December 31, 2013. Rustic tiles accounted for 9.7% of total sales for the year ended December 31, 2014 from 12.5% for the year ended December 31, 2013.We have been promoting rustic tiles since we introduced them in 2007 and believe that rustic tiles will become a larger portion of our product mix due to its variety of patterns and textures.

 

Polished glazed tiles. Revenue from polished glazed tiles increased 105.7% from RMB 72.6 million for the year ended December 31, 2013 to RMB 149.4 million ($24.1 million) for the year ended December 31, 2014, mainly due to an increase in sales volume. The sales volume increased by 100.4% or 1.3 million square meters to approximately 2.6 million square meters for the year ended December 31, 2014 from 1.3 million square meters for the year ended December 31, 2013. We began selling polished glazed tiles in the second quarter of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble or stone materials used in a decorative fashion inside homes. The polished glazed tiles are of a larger size than our other tiles and we believe that demand for this series will increase in the future.

 

Cost of sales. The following table sets forth the breakdown of cost of sales, by product segment, for December 31, 2013 and 2014:

 

Cost of sales RMB (‘000)  2013   Percentage   2014   Percentage 
Porcelain   598,771    68.13%   628,185    67.31%
Glazed Porcelain   55,787    6.34%   43,946    4.71%
Glazed   42,847    4.88%   38,011    4.07%
Rustic   110,442    12.57%   90,263    9.68%
Polished Glazed   70,971    8.08%   132,815    14.23%
Total   878,818    100.00%   933,220    100.00%

 

Cost of sales was RMB 933.2 million ($150.4 million) for the year ended December 31, 2014 compared to RMB 878.8 million for the year ended December 31, 2013, representing an increase of RMB 54.4 million, or 6.2%. The increase in cost of sales was primarily due to the increase in raw material costs and costs of energy source.

 

Gross profit. The following table sets forth the breakdown of our gross profit and gross profit margin, by product segment, for December 31, 2013 and 2014:

 

   December 31, 
   2013   2014 
RMB (‘000)  Gross Profit   Profit Margin   Gross Profit   Profit Margin 
Porcelain   45,032    6.99%   75,390    10.72%
Glazed Porcelain   (671)   (1.22)%   147    0.33%
Glazed   1,994    4.45%   2,093    5.22%
Rustic   6,061    5.20%   10,249    10.20%
Polished Glazed   1,660    2.29%   16,552    11.08%
All products   54,076    5.80%   104,431    10.06%

 

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Our gross profit increased 93.1% or RMB 50.3 million from RMB 54.1 million for the year ended December 31, 2013 to RMB 104.4 million ($16.8 million) for the year ended December 31, 2014. Our gross profit margin was increased from 5.8% for the year ended December 31, 2013 to 10.1% for the year ended December 31, 2014. The year-over-year increase in gross profit margin was primarily driven by an increase in the selling prices of our products since the third quarter of 2014.

 

Administrative expenses. Administrative expenses were RMB 29.5 million ($4.8 million) for the year ended December 31, 2014, compared to RMB 27.6 million for the year ended December 31, 2013, representing an increase of RMB 1.9 million, or 7.1%. The year-over-year increase in administrative expenses was primarily due to the increase in audit fees and lawyer fees related to the regaining of compliance with the Nasdaq requirments and the outstanding class action litigation.

 

Finance costs. Finance costs increased 8.5% or RMB 0.4 million from RMB 4.2 million for the year ended December 31, 2013 to RMB 4.6 million ($0.7 million) for the year ended December 31, 2014. The year-over-year increase in finance costs was resulted from the increase in interest paid on bank borrowings outstanding in 2014.

 

Other expenses. Other expenses decreased 45.8% or RMB 9.3 million from RMB 20.2 million for the year ended December 31, 2013 to RMB10.9 million ($1.8 million) for the year ended December 31, 2014. In 2013, we disposed of old equipment at our Hengda facility resulting in an expense of RMB 18.9 million. In 2014, loss on diposal of property, plant and equipment was RMB 3.5 million. Other expenses in 2014 included the provision for a litigation claim of RMB 5.3 million relating to the settlement of the outstanding class action litigation.

 

Loss before taxation. Loss before taxation increased 275.7% from RMB 3.7 million for the year ended December 31, 2013 to RMB 13.9 million ($2.2 million) for the year ended December 31, 2014. The increase in loss before taxation was mainly due to realized and unrealized fair value loss on derivative financial instruments of RMB 59.5 million ($9.6 million), as opposed to a gain of RMB 3.3 million in 2013. During the second quarter of 2013 and the first quarter of 2014, we entered into certain foreign currency transaction agreements with Taishin International Bank for investment purposes. The agreements meet the definition of a derivative: no initial net investment; value changes in response to the change of exchange rate (US$ versus RMB); and the agreements are settled at a future date. In July 2014, our Chief Executive Officer, the Company’s largest shareholder, and an affiliate of our Chief Executive Officer, agreed to assume these agreements. As a result, after July 31, 2014, we were no longer required to fund any losses related to these agreements, and will neither suffer any future liabilities arising under those agreements nor realize any benefits arising under those agreements.

 

Income taxes. We incurred an income tax expense of RMB 16.5 million ($2.7 million) for the year ended December 31, 2014 compared to an income tax credit of RMB 1.7 million for the year ended December 31, 2013, representing an increase in expenses of RMB 18.1 million. Our PRC statutory enterprise income tax rate was 25.0% for the years ended December 31, 2014 and 2013. Excluding the loss of our BVI holding company and Hong Kong incorporated subsidiary, our effective tax rates for 2014 were 25.4%. The tax credit in 2013 was related to over-provision of PRC income tax in prior years of RMB2.9 million, offset by withholding tax on profits retained by our PRC subsidiary of RMB1.2 million.

 

Loss attributable to shareholders. Loss attributable to shareholders increased approximately RMB28.3 million or 14 times from RMB 2.0 million for the year ended December 31, 2013 to RMB 30.3 million ($4.9 million) for the year ended December 31, 2014. The year-over-year increase in loss attributable to shareholders was primarily caused by the increase in fair value loss on derivative financial instruments of RMB 62.8 million in 2014 and the increase in income tax expenses of RMB18.1 million, offset by an increase in gross profit of RMB50.4 million.

 

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Year ended 2013 compared to the year ended 2012

 

Revenue.  The following table sets forth the breakdown of revenue, by product categories, for fiscal years 2012 and 2013:

 

   December 31, 
Revenue RMB (‘000)  2012   Percentage   2013   Percentage 
Porcelain   784,383    54.29%   643,803    69.01%
Glazed Porcelain   57,359    3.97%   55,116    5.91%
Glazed   97,411    6.74%   44,841    4.81%
Rustic   374,276    25.90%   116,503    12.49%
Ultra-thin   45,794    3.17%   -    - 
Polished Glazed   85,668    5.93%   72,631    7.78%
Total   1,444,891    100.00%   932,894    100.00%

 

Revenue decreased by RMB 512.0 million, or 35.4%, to RMB 932.9 million in the year ended December 31, 2013, from RMB 1,444.9 million for the year ended December 31, 2012. The year-over-year decrease in revenue was primarily driven by a 24.8% decrease in the sales volume of ceramic tiles to 34.7 million square meters in the year ended December 31, 2013 from 46.2 million square meters in the year ended December 31, 2012. In addition, we began price reductions in December 2012 that resulted in a 14.1% decrease in our average selling price in 2013 as compared to 2012 (RMB 26.9 per square meter for the year end 2013 per square meter compared to RMB 31.3 per square meter for 2012). We attributed our reduced sales volume to the continued challenging business conditions in China’s real estate and construction sector duiring the period. Because no distributors ordered ultra-thin tiles for 2013, we stopped production of ultra-thin tiles in 2013.

 

Porcelain tiles. Revenue from porcelain tiles decreased 17.9% from RMB 784.4 million for the year ended December 31, 2012 to RMB 643.8 million for the year ended December 31, 2013. The decrease was primarily attributable to a decrease in the sales volume and the average selling price. The average selling price decreased by 9.6% to RMB 24.4 per square meter for the year ended December 31, 2013 from an average selling price of RMB 27.0 per square meter for the year ended December 31, 2012, the sales volume decreased by 2.7 million square meters to approximately 26.4 million square meters for the year ended December 31, 2013 from 29.1 million square meters for the year ended December 31, 2012. The decrease in volume was caused by a reduction in market demand. Porcelain tiles for exterior walls are still our most popular product and have the largest market potential of all of our tiles. We expect porcelain tiles to continue to be our key product for the foreseeable future.

 

Glazed porcelain tiles. Revenue from glazed porcelain tiles decreased 4.0% from approximately RMB 57.4 million for the year ended December 31, 2012 to RMB 55.1 million for the year ended December 31, 2013. The decrease was mainly due to a decrease in average selling price. The average selling price decreased 4.1% to RMB 25.7 per square meter for the year ended December 31, 2013 from an average selling price of RMB 26.8 per square meter for the year ended December 31, 2012. Glazed porcelain tiles accounted for 5.9% of total sales for the year ended December 31, 2013 compared to 4.0% for the year ended December 31, 2012.

 

Glazed tiles. Revenue from glazed tiles decreased by 54.0% from RMB 97.4 million for the year ended December 31, 2012 to RMB 44.8 million for the year ended December 31, 2013. The decrease was mainly due to a decrease in sales volume. The sales volume decreased by 2.8 million square meters to approximately 2.1 million square meters for the year ended December 31, 2013 from 4.9 million square meters for the year ended December 31, 2012. Glazed tiles have a lower selling price than our other products. Glazed porcelain tiles accounted for 4.8% of total sales for the year ended December 31, 2013 compared to 6.7% for the year ended December 31, 2012.

 

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Rustic tiles. Revenue from rustic tiles decreased 68.9% from RMB 374.3 million for the year ended December 31, 2012 to RMB 116.5 million for the year ended December 31, 2013 which was mainly due to a decrease of sales volume and average selling price. The sales volume decreased by 4.6 million square meters to approximately 2.7 million square meters for the year ended December 31, 2013 from 7.3 million square meters for the year ended December 31, 2012. The average selling price decreased 16.5% to RMB 42.5 per square meter for the year ended December 31, 2013 from an average selling price of RMB 50.9 per square meter for the year ended December 31, 2012. Rustic tiles accounted for 12.5% of total sales for the year ended December 31, 2013 from 25.9% for the year ended December 31, 2012.We have been promoting rustic tiles since it was introduced in 2007 and believe that rustic tiles will become a larger portion of our product mix due to its variety of pattern and texture.

 

Ultra-thin tiles. Revenue from ultra-thin tiles decreased 100% from RMB 45.8 million for the year ended December 31, 2012 to nil for the year ended December 31, 2013 as no distributors ordered ultra-thin tiles for the year ended December 31, 2013.

 

Polished glazed tile. Revenue from polished glazed tiles decreased 15.3% from RMB 85.7 million for the year ended December 31, 2012 to RMB 72.6 million for the year ended December 31, 2013, mainly due to the decrease in average selling price. The average selling price decreased by 11.1% to RMB 55.5 per square meter for the year ended December 31, 2013 from an average selling price of RMB 62.4 per square meter for the year ended December 31, 2012. We introduced polished glazed tiles in March 2011 and began selling them in the second quarter of 2011. We believe that this product represents both a functional and cost-effective replacement for actual marble or stone materials used in a decorative fashion inside homes. The polished glazed tiles are of a larger size than our other tiles and we believe that demand for this series will increase in the future.

 

Cost of sales. The following table sets forth the breakdown of cost of sales, by product segment, for December 31, 2012 and 2013:

 

   December 31, 
Cost of sales RMB (‘000)  2012   Percentage   2013   Percentage 
Porcelain   576,279    54.15%   598,771    68.13%
Glazed Porcelain   49,633    4.67%   55,787    6.34%
Glazed   94,641    8.90%   42,847    4.88%
Rustic   255,933    24.06%   110,442    12.57%
Ultra-thin   29,110    2.74%   -    - 
Polished Glazed   58,296    5.48%   70,971    8.08%
Total   1,063,892    100.00%   878,818    100.00%

 

Cost of sales was RMB 878.8 million for the year ended December 31, 2013 compared to RMB 1,063.9 million for the year ended December 31, 2012, representing a decrease of RMB 185.1 million, or 17.4%. The decrease in cost of sales was primarily due to the decrease in sales volume.

 

Gross profit. The following table sets forth the breakdown of our gross profit and gross profit margin, by product segment, for December 31, 2012 and 2013:

 

   December 31, 
   2012   2013 
RMB (‘000)  Gross Profit   Profit Margin   Gross Profit   Profit Margin 
Porcelain   208,104    26.53%   45,032    6.99%
Glazed Porcelain   7,726    13.47%   (671)   (1.22)%
Glazed   2,770    2.84%   1,994    4.45%
Rustic   118,343    31.62%   6,061    5.20%
Ultra-thin   16,684    36.43%   -    - 
Polished Glazed   27,372    31.95%   1,660    2.29%
All products   380,999    26.37%   54,076    5.80%

 

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Our gross profit decreased 85.8% from RMB 381.0 million for the year ended December 31, 2012 to RMB 54.1 million for the year ended December 31, 2013. Our gross profit margin declined from 26.4% for the year ended December 31, 2012 to 5.8% for the year ended December 31, 2013. The year-over-year decrease in gross profit margin was primarily driven by a decrease in the selling price and an increase in material cost and labor cost. The decrease in gross profit during the period in dollar terms was mainly driven by the decrease in sales volume and price since the fourth quarter of 2012.

 

Administrative expenses. Administrative expenses were RMB 27.6 million for the year ended December 31, 2013, compared to RMB 30.0 million for the year ended December 31, 2012, representing a decrease of RMB 2.4 million, or 8.0%. The year-over-year decrease in administrative expenses was primarily due to a reduction to RMB 2.1 million of non-cash share-based compensation expenses in 2013 related to the 2010 Incentive Compensation Plan, which is designed to retain directors and senior management. The comparable non-cash share-based expenses were RMB 5.7 million in the year ended December 31, 2012.

 

Finance costs. Finance costs decreased 54.8% from RMB 9.3 million for the year ended December 31, 2012 to RMB 4.2 million for the year ended December 31, 2013. The year-over-year decrease in finance costs resulted from the decrease in average debt outstanding in 2013. The average debt outstanding was RMB 79,826,000 and RMB 122,500,000 during the years ended December 31, 2013 and 2012, respectively.

 

Other expenses. Other expenses increased about 9.4 times from RMB 1.9 million for the year ended December 31, 2012 to RMB 20.2 million for the s year ended December 31, 2013. The year-over-year increase was primarily caused by the loss on disposal of property, plant and equipment of RMB 18.9 million. The disposal of property, plant and equipment primarily related to the disposal of old equipment at our Hengda facility during 2013.

 

Profit/(loss) before taxation. We recorded a profit of RMB 328.8 million before taxation for the year ended December 31, 2012 and a loss of RMB 3.7 million before taxation for the year ended December 31, 2013. The loss in 2013 was mainly due to our lower gross profit.

 

Income taxes. We incurred an income tax credit of RMB 1.7 million for the year ended December 31, 2013 compared to an income tax expense of RMB 84.9 million for the year ended December 31, 2012, representing a decrease in income tax expense of RMB 86.6 million, due to lower profit before taxation in 2013. Our PRC statutory enterprise income tax rate was 25.0% for the years ended December 31, 2013 and 2012. The tax credit in 2013 was related to over-provision of PRC income tax in prior years of RMB 2.9 million, offset by withholding tax on profits retained by our PRC subsidiary of RMB 1.2 million.

 

Profit/(loss) attributable to shareholders. We recorded a profit of RMB 243.8 million attributable to shareholders for the year ended December 31, 2012 and a loss of RMB 2.0 million attributable to shareholders for the year ended December 31, 2013. The year-over-year change from net profit to net loss was primarily driven by lower gross profit in 2013.

 

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Liquidity and Capital Resources

 

The following table presents a summary of our cash flows and beginning and ending cash balances for the years ended December 31, 2012, 2013 and 2014:

 

   Year Ended December 31, 
RMB(‘000)  2012   2013   2014 
Net cash generated from operating activities   191,201    52,115    22,717 
Net cash (used in)/generated from investing activities   (18,871)   (128,664)   12,991 
Net cash (used in)/generated from financing activities   (125,000)   15,990    (3,402)
Net cash flow   47,330    (60,559)   32,306 
Cash and cash equivalents at beginning of year   42,149    89,448    28,848 
Effect of foreign exchange rate differences   (31)   (41)   1 
Cash and cash equivalents at end of year   89,448    28,848    61,155 

 

We have historically financed our liquidity requirements mainly through operating cash flow, bank loans and issuance of new shares.

 

Cash flows from operating activities.

 

Our net cash generated from operating activities was RMB 22.7 million ($3.7 million) for the year ended December 31, 2014, a decrease of RMB 29.4 million, or 56.4%, from RMB 52.1 million net cash generated from operating activities in 2013. The year-over-year decrease was mainly due to an increased level of trade receivables and a decrease in trade payables in 2014. We had a cash outflow for trade receivables of RMB 58.9 million ($9.5 million) and a cash outflow for trade payables of RMB 30.4 million ($4.9 million) in 2014. In 2013, we had a cash outflow for trade receivables of RMB 35.1 million and a cash inflow for trade payables of RMB 37.4 million. The year over year decrease was offset by an increased level of accrued liabilities, other payables and amounts due to related parties. We have a cash inflow for this liabilities and payables of RMB 28.8 million ($4.6 million) in 2014 compared to a cash outflow of RMB 11.1 million in 2013.

 

Our net cash generated from operating activities was RMB 52.1 million for the year ended December 31, 2013, a decrease of RMB 139.1 million, or 72.8%, from RMB 191.2 million net cash generated from operating activities for the year ended December 31, 2012. The year-over-year decrease was driven by the slowdown and decrease of revenue in 2013, resulting in a loss before taxation of RMB 3.7 million in 2013 as compared to a profit before taxation of RMB 328.8 million in 2012. Also, our trade receivables and inventory level increased in 2013. We had a cash outflow for trade receivables of RMB 35.1 million and cash outflow for inventory of RMB 40.2 million in 2013. In 2012, we had a cash inflow for trade receivables of RMB 17.3 million and a cash outflow for inventory of RMB 3.1 million. The decrease in cash inflow in 2013 was offset by (i) an increase in trade payables (we had a cash inflow of trade payables of RMB 37.4 million in 2013 and a cash outflow of trade payables of RMB 137.6 million in 2012); and (ii) a reduced income tax obligation as a result of lower profit in 2013 (we paid income taxes of RMB 6.2 million and RMB 120.2 million in 2013 and 2012, respectively).

 

Inventory and Accounts Receivable.

 

Our inventory turnover rate decreased from 3.65 times in 2012 to 2.94 times for the year ended December 31, 2013 and further decreased to 2.92 times for the year ended December 31, 2014. Based on our historical experience, except for the RMB 23.4 million and RMB 2.4 million ($0.4 million) of inventory that was impaired for the years ended December 31, 2013 and 2014, respectively, we believe that the value of our current inventories is realizable.

 

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The average number of days in which we received payment on our trade receivables, net of value-added tax, was increased from 100 days in 2012 to 158 days for the year ended December 31, 2013 and decreased to 156 days for the year ended December 31, 2014. Since the end of 2012, we had extended the collection period from 90 days to 150 days to address funding pressures of our distributors. Other customers were granted a credit period of 90 days in 2013 and 2012, and extended to 120 days in 2014. Based on our historical experience and current operation, we believe that all our trade receivables are collectable in full.

 

Cash flows from investing activities.

 

Net cash generated from investing activities in the year ended December 31, 2014 was RMB 13.0 million ($2.1 million), compared to RMB 128.7 million of net cash used in investing activities in the same period of 2013. The investing cash inflows in 2014 were primary caused by the proceeds from disposal of property, plant and equipment of Hengda.

 

Net cash used in investing activities in the year ended December 31, 2013 was RMB 128.7 million, compared to RMB 18.9 million of net cash used in investing activities in the year ended December 31, 2012. The increase in investing cash outflows was primary due to i) an increase in acquisition of property, plant and equipment, modification of an existing production line of Hengda, acquisition of equipment at Hengda facility that replaced coal with gas as the source of Hengda’s power supply and the completion and interior build-out of office; and (ii) an increase in restricted cash in relation to the Company’s bank borrowings and foreign currency transactions agreements.

 

Cash flows from financing activities.

 

For the year ended December 31, 2014, net cash used in financing activities was RMB 3.4 million ($0.5 million), primarily due to the net repayment of bank borrowings, compared to net cash generated from financing activities of RMB16.0 million for the same period of 2013.

 

For the year ended December 31, 2013, net cash generated from financing activities was RMB 16.0 million due to new bank borrowings, offset by the payment of dividends and deposit to the stock transfer agent for dividend payment payment, as compared to net cash used in financing activities of RMB125.0 million for the year ended December 31, 2012 caused by repayment of bank borrowings.

 

The major sources of our liquidity for fiscal year 2012, 2013 and 2014 were cash generated from operations and bank borrowings. The cash generated in 2014 was primarily due to the cash generated from operating activities of RMB 22.7 million ($3.7 million) and the cash generated from investing activities of RMB 13.0 million ($2.1 million), offset primarily by repayment of bank loans. The cash generated in 2013 was primarily due to the cash generated from operating activities of RMB 52.1 million and net new bank borrowings of RMB 40.0 million, offset primarily by the cash payment of RMB 97.1 million for the acquisition of property, plant and equipment for the Hengdali facility and Hengda facility, increase in restricted cash of RMB 37.4 million, deposit to the stock transfer agent for dividend payment RMB 11.8 million and payment RMB 11.8 million for dividends. The cash generated in 2012 was primarily due to the cash generated from operating activities of RMB 191.2 million, offset primarily by the cash payment of RMB 19.5 million for the acquisition of property, plant and equipment for the replacement of old equipment at its Hengda facility and repayment of bank borrowing of RMB 125.0 million.

 

Cash and bank balances were RMB 61.2 million ($9.9 million) as of December 31, 2014, as compared to RMB 28.8 million as of December 31, 2013, and RMB 89.4 million at December 31, 2012.

 

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As of December 31, 2014, our total outstanding bank loans amounted to RMB 84.7 million ($13.7 million) with interest rates in the range of 2.48% to 8.16% per annum and maturity dates in the range of January 22, 2015 to November 10, 2015.

 

Operating lease commitments totaled RMB 6.1 million ($1.0 million) as of December 31, 2014.

 

There were no capital commitments as of December 31, 2014.

 

There were commitments for advertising and insurance expenditure totaling RMB 2.4 million ($0.4 million) as of December 31, 2014.

 

In our opinion, our working capital, including our cash, income and cash flows from operations, and short-term borrowings, is sufficient for our present requirements.

 

However, we may sell additional equity or obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future acquisitions and capital equipment expenditures. The sale of additional equity would result in further dilution to our shareholders. The incurrence in indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot provide assurance that financing will be available in amounts or on terms acceptable to us, if at all.

 

Inventory Management

 

Our inventory is comprised of raw materials, work in progress and finished goods. Raw materials are purchased from our suppliers located in Fujian, Guangdong and Jiangxi Provinces and comprise mainly of clay, coal, colorings, and glazing materials.

 

We have sufficient raw materials to support, on average, three weeks of production at any point in time. This helps to minimize any potential delays in our production process which may arise due to insufficient raw materials. Our production of ceramic tiles is based on customers’ orders. In doing so, we minimize storage space and maintain a relatively low inventory level of finished products. The inventory turnover in 2014 stayed stable as compared with that in 2013, but increased as compared with 2012. This reflects the decrease in sales volume of ceramic titles in 2013 and 2014 as compared to 2012. Our inventory turnover for the years ended 2012, 2013 and 2014 are as follows:

   FY2012   FY2013   FY2014 
Inventories (RMB’000)   290,603    307,436    330,763 
Inventory turnover (days)(1)   100    124    125 

 

(1)The average inventory turnover is computed based on the formula: (simple average opening and closing inventories balance in a financial year / cost of sales) × 365 days.

 

In December 2012, the Company launched a sales promotion which decreased some of the selling prices of the products, resulting in the carrying value of some of its inventory being higher than their net realizable value. Provision for the declines in the value of inventory for the years ended December 31, 2012, 2013 and 2014 was RMB 4,237,000, RMB 23,414,000 and RMB 2,438,000 ($0.4 million), respectively, and was primarily charged to Cost of Sales.

 

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Credit Management

 

Credit terms to our customers

 

We typically extend credit terms of approximately 90 days to our customers. We will grant credit terms based on the reputation, creditworthiness, size of orders, payment records and number of years we have done business with the customer. We do not have a goods return policy. Considering the challenging market conditions in China’s real estate industry, we extended the collection period to 150 days to address funding pressures of our distributors since the year ended December 31, 2012. Other customers were granted a credit period of 90 days in the years ended December 31 2013 and 2012 and extended to 120 days in the year ended December 2014.

 

Personnel from our sales and marketing department typically conduct visits to new customers to evaluate their credit worthiness before entering into any arrangements with them. In addition, as Hengda was awarded the top 500 brand, we increased the deposit required from new distributors from RMB 0.4 million to RMB 1.0 million.

 

Our average trade receivables’ turnover days in the three years ended December 31, 2014 were as follows:

 

   FY2012   FY2013   FY2014 
Trade receivables (RMB’000)   455,885    490,989    549,925 
Trade receivables turnover (days)(1)   100    158    156 

 

(1)The average trade receivables’ turnover is computed based on the formula: (simple average opening and closing trade receivables balance, net of value-added tax in a financial year/revenue) × 365 days.

 

Credit terms from our suppliers

 

Our typical credit terms from our major suppliers are from 1 to 4 months after the raw materials have been delivered. Our average trade payables’ turnover days in the last three years ended December 31, 2014 were as follows:

 

   FY2012   FY2013   FY2014 
Trade payables (RMB’000)   115,123    152,572    122,168 
Trade payables turnover (days)(1)   78    68    64 

 

(1)The average trade payables’ turnover is computed based on the formula: (simple average opening and closing trade payables balance, net of value-added tax in a financial year / purchases ) × 365 days.

 

Trade payables turnover, net of value-added tax, was 64 days as of December 31, 2014 compared with 68 days as of December 31, 2013. The year-over-year decrease in trade payables turnover resulted from the lower average quarter-end trade balances in the trailing twelve month in 2014. The average turnover days were within the Company’s normal credit period.

 

Capital Expenditures

 

Our capital expenditures primarily consist of expenditures on property, plant and equipment.

 

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We had no capital expenditures on property, plant and equipment for the year ended December 31, 2014 compared to RMB 97.1 million for the same period in 2013.

 

Capital expenditures on property, plant and equipment was RMB 97.1 million for the year ended December 31, 2013, compared to RMB 19.5 million for the same period in 2012. In 2013, we expended RMB 51.7 million for the acquisition of equipment at our Hengda and Hengdali facilities to improve production lines, expended RMB 28.4 million to modify an existing production line at the Hengda facility to enable the manufacture of products that are in high demand, expended RMB 5.6 million for the acquisition of equipment at Hengda facility that replaced coal with gas as the source of Hengda’s power supply and expended RMB11.4 million for the interior build-out of the completed office building adjacent to the Hengdali facility.

 

Contractual Obligations

 

Our contractual obligations consist mainly of debt obligations, operating lease obligations and other purchase obligations and commitments, and will be paid off with our cash flow from operations. The following table sets forth a breakdown of our contractual obligations (including both interest and principal cash flows) as of December 31, 2014:

 

   Payment Due by Period 
   Total   Less than 1
year		   1-3 years   3-5
years		   More than
5 years		 
Short-term debt obligations(1)   85,671    85,671    -    -      
Operating purchase obligations(2)   6,060    5,607    453    -    - 
Other obligations(3)   2,439    2,439    -    -    - 
Total   94,170    93,717    453    -    - 

 

(1)Amounts represent principal and interest cash payments over the life of the bank loans, including anticipated interest payments that are not recorded in the financial statements as of December 31, 2014.

 

(2)We lease plant buildings, production factories, warehouses and employees’ hostel from non-related parties under non-cancellable operating lease arrangements.

 

(3)Includes advertising and insurance expenditure contracted but not provided for in the financial statements as of December 31, 2014

 

The following table sets forth further details regarding our loans outstanding as of December 31, 2014:

 

Short-term debt obligations:  Amount of loans RMB’000   Interest rates (p.a)
China Citic Bank   45,000   7.80% -8.16%
Taishin International Bank   39,704   2.48%-2.50%

 

Research and Development

 

We have devoted substantial resources to establishing research and development capabilities in an effort to improve our products and diversify our product mix. Our research and development team focuses on new products as well as developing energy and resource efficient production methods.

 

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We focus our research and development efforts on the following:

 

·Expanding and improving production capacity;

 

·Improving and developing new production and processing techniques;

 

·Improving the use and selection of raw materials to lower costs; and

 

·Developing new products and designs to address changing market demands.

 

Our research and development expenses were approximately RMB 1.2 million, RMB 1.1 million and RMB 1.3 million ($0.2 million), for fiscal years 2012, 2013 and 2014. From time to time, we may enter into collaboration with other research institutes to develop new products or improve our production process.

 

Backlog

 

We typically receive orders from customers two months in advance of production on a rolling basis. We enter into a dealership agreement with customers, and a sales or purchase contract each time a customer places an order. If a customer makes any changes to an order after we have used any raw materials in fulfilling the order, the customer bears the losses. Once we have delivered the products to the customer and the customer has examined and accepted the products, we provide no quality guarantees. We confirm amounts payable with each customer on a monthly basis. The products typically must be delivered to customers within 90 days of receipt of the sales order, and the customers typically must pay for the products within 90 to 150 days of delivery.

 

As of December 31, 2014, our backlog was RMB 137.0 million ($22.1 million) which represents approximately the next two months of revenue at the time, compared to a backlog of approximately RMB 136.6 million on December 31, 2013, a year-over-year increase of 0.3%.

 

Dividends

 

We paid a cash dividend of $0.10 per share each on July 13, 2013 and January 14, 2014 to our shareholders, which totaled $4.1 million (equivalent to RMB 24.9 million gross, RMB23.66 million net of 5% PRC withholding tax). In 2014, we paid a cash dividend of $0.0125 per share each on July 14, 2014 and January 14, 2015 to our shareholders, which totaled $0.5 million (equivalent to RMB 3.2 million gross, RMB 3.0 million net of 5% PRC withholding tax).

 

Off-Balance Sheet Arrangements

 

We do not have any outstanding off-balance arrangements and have not entered into any transactions that are established for the purpose of facilitating off-balance sheet arrangements.

 

Impact of Inflation

 

The general annual inflation rate in China was approximately 2.6% in both 2012 and 2013 and 2.0% in 2014, according to the National Bureau of Statistics. Our results of operations may be affected by inflation, particularly rising prices for energy, labor costs, raw materials and other operating costs. See “Item 3. Key Information — Risk Factors — Risks relating to our business — If China’s inflation increases or the prices of energy or raw materials increase, we may not be able to pass the resulting increased costs to our customers and this may adversely affect our profitability or cause us to suffer operating losses.”

 

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FINANCIAL RISK MANAGEMENT

 

We are exposed to financial risks arising from our operations and the use of financial instruments. The key financial risks included credit risk, liquidity risk, interest rate risk, foreign currency risk and market price risk.

 

Apart from the foreign currency forward contracts that we have entered into during 2013 and 2014, we do not hold or issue derivative financial instruments for trading purposes or to hedge against fluctuations, if any, in interest rates and foreign exchange rates.

 

Our exposure to these financial risks increased substantially during 2013 and 2014 due to our execution of the foreign currency forward contracts. However, in July 2014 those contracts were assumed by an affiliate of our Chairman and we were released from the liabilities that we incurred under those contracts. We do not intend to enter into similar contracts in the future.

 

(i)Credit risk

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to us. Our exposure to credit risk arises primarily from bank balances and trade receivables. For trade receivables, we adopt the policy of dealing only with customers of appropriate credit history to mitigate credit risk. For other financial assets, we adopt the policy of dealing only with high credit quality counterparties.

 

As we do not hold any collateral, the maximum exposure to credit risk for each class of financial assets is the carrying amount of that class of financial assets presented on the consolidated statements of financial position.

 

Cash and bank balances

 

Our bank deposits are placed with reputable banks in the PRC, Hong Kong and the United States. The credit exposure of our cash and bank balances (including restricted cash) as of December 31, 2012, 2013 and 2014 were RMB 89,448,000, RMB 66,207,000 and RMB 90,027,000 ($14,510,000), respectively.

 

Trade receivables

 

Our objective is to seek continual growth while minimizing losses incurred due to increased credit risk exposure.

 

We have significant concentration of credit risk as the Company’s top three largest trade receivables represent approximately 18%, 15% and 17% of the trade receivable balance as of December 31, 2012, 2013 and 2014, respectively. Our five largest trade receivables represented approximately 23%, 21% and 25% of the trade receivable balance as of December 31, 2012, 2013 and 2014, respectively.

 

Our exposure to credit risks is influenced mainly by the individual characteristics of each customer. We typically give our existing customers credit terms of approximately 120 days to 150 days. In deciding whether credit shall be extended, we will take into consideration factors such as the relationship with the customer, its payment history and credit worthiness. In relation to new customers, the sales and marketing department will prepare credit proposals for approval by the Chief Executive Officer.

 

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We perform ongoing credit evaluation of our customers’ financial condition and require no collateral from our customers. The provision for impairment loss for doubtful debts is based upon a review of the expected collectability of all trade and other receivables.

 

The credit exposure of our trade receivables as of December 31, 2012, 2013 and 2014 was RMB 455,885,000, RMB 490,989,000 and RMB 549,925,000 ($88,632,000), respectively.

 

(ii)Liquidity risk

 

Liquidity risk is the risk that we will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

 

Our exposure to liquidity risk arises primarily from mismatches of the maturities of financial assets and liabilities. Our objective is to maintain a balance between continuity of funding and flexibility through the use of stand-by credit facilities.

 

The table below summarizes the maturity profile of the liabilities based on contractual undiscounted payments:

 

   As of December 31, 2014 
   Within 1 year   More than 1
year but less
than 3 years		   Total 
   RMB’000   RMB’000   RMB’000 
Trade payables   122,168    -    122,168 
Amounts owed to related parties   24,902    -    24,902 
Interest-bearing bank borrowings (1)   85,671    -    85,671 
Total   232,741    -    232,741 
(1)Includes contractual interest payments

 

We intend to ensure that there are adequate funds to meet all our obligations in a timely and cost-effective manner. We intend to maintain sufficient levels of cash and cash equivalents and have available an adequate amount of committed credit facilities from financial institutions to meet our liquidity requirements in the short and longer term.

 

(iii)Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of our financial instruments will fluctuate because of changes in market interest rates.

 

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Our exposure to interest rate risk arises primarily from our interest-bearing bank deposits and borrowings. As of December 31, 2014, RMB 10.0 million ($1.6 million) of our borrowings were on a fixed rate basis and RMB 74.7 million ($12.0 million) were on a variable rate basis.

 

We are exposed to fair value interest rate risk in relation to our fixed-rate bank borrowings. Bank borrowings subject to fixed interest rates are contractually repriced at intervals of 12 months. We currently do not have an interest rate hedging policy. However, the management monitors interest rate exposure and will consider other necessary actions when significant interest rate exposure is anticipated.

 

We are also exposed to cash flow interest rate risk related to bank balances and cash held at financial institutions carried at prevailing market rate and variable-rate bank borrowings.

 

At December 31, 2014, if average interest rate on our variable-rate bank borrowings had been 50 basis point higher/lower, loss before tax for the year ended December 31, 2014 would have been increased/decreased by RMB 374,000/RMB 374,000 (2013: increased/decreased loss before tax by approximately RMB 448,000 /RMB 448,000, 2012: decreased/increased profit before tax by approximately RMB 300,000 /RMB 300,000).

 

(iv)Foreign currency risk

 

Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises when transactions are denominated in foreign currencies.

 

Our operations are primarily conducted in the PRC. All the sales and purchases transactions are denominated in RMB. As such, the operations are not exposed to exchange rate fluctuation.

 

As at December 31, 2012, 2013 and 2014, nearly all of our monetary assets and monetary liabilities were denominated in RMB except that as of December 31, 2014, certain bank balances, bank borrowings and other payables were denominated in US dollars.

 

During the second quarter of 2013 and the first quarter of 2014, we entered into foreign currency forward contracts for investment purposes. The net fair value of foreign exchange forward contracts entered into by us at December 31, 2013 was RMB 44,000 and have been recognized as derivative financial instruments. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, entered into a three party agreement (the “Novation”) with the financial institution that originated the foreign currency transaction agreements and us. Under the Novation, Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under the foreign currency transaction agreements after July 31, 2014.

 

The Group’s foreign currency risk is mainly concentrated on the fluctuation of US$ and HK$. The following table details the Group’s sensitivity to a 4% increase and decrease in RMB against the relevant foreign currencies. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the years end for a 4% change. On this basis, if RMB strengthens against foreign currencies by 4%, the Group’s (loss)/profit before taxation for the year would decreased by the following amount, and vice versa.

 

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   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
(Loss) /Profit before taxation   1,855    (322,151)   (21)

 

1 Mainly as a result of fair value (including foreign exchange) losses/gains on foreign currency forward contracts.

 

Critical Accounting Policies and Judgment

 

Our consolidated financial statements are prepared in accordance with IFRS including related interpretations as issued by the IASB, and have been consistently applied throughout the years ended December 31, 2012, 2013, and 2014. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions.

 

Inventories

 

Inventories are carried at the lower of cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overhead.

 

Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and applicable selling expenses.

 

When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

 

Financial instruments

 

Recognition, initial measurement and subsequent measurement

 

Financial assets and financial liabilities are recognized when we become a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transaction costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below.

 

Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or expires.

 

Classification and subsequent measurement of financial assets

 

For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into the following categories upon initial recognition:

 

-Loans and receivables

 

-Financial assets at fair value through profit or loss (“FVTPL”)

 

-Held-to-maturity (“HTM”) investments

 

-Available-for-sale (“AFS”) financial assets

 

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All financial assets except for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below.

 

All income and expenses relating to financial assets are recognized in profit and loss.

 

Loans and receivables

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue. After initial recognition, these are subsequently measured at amortized cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. Our cash and trade receivables fall into this category of financial instruments.

 

Financial assets at FVTPL

 

Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply.

 

Assets in this category are measured at fair value with net changes in fair value presented in the statement of profit or loss. Transaction costs are expensed as incurred. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists.

 

HTM investments

 

HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturity other than loans and receivables. Investments are classified as HTM if we have the intention and ability to hold them until maturity.

 

HTM investments are measured subsequently at amortized cost using the effective interest method. We do not have any financial assets classified as HTM.

 

AFS financial assets

 

AFS financial assets are non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. We do not have any financial assets classified as AFS.

 

After initial measurement, AFS financial investments are subsequently measured at fair value with unrealized gains or losses recognized in other comprehensive income and credited in the AFS reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired. Interest is calculated using the effective interest method and dividends are recognized in profit or loss within finance income.

 

Impairment of financial assets

 

We assess, at the end of each reporting period, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment could include:

 

•significant financial difficulty of the issuer or counterparty; or
•breach of contract, such as default or delinquency in interest or principal payments; or
•it becoming probable that the borrower will enter bankruptcy or financial re-organization; or
•significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

 

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If any such evidence exists, the impairment loss on trade and other financial assets carried at amortized cost is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate, where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

 

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.

 

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade debtors included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When we are satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit or loss.

 

Classification and subsequent - measurement of financial liabilities

 

Financial liabilities are classified as FVTPL, or other financial liabilities, as appropriate upon initial recognition. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired.

 

iFinancial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transactioncosts. Subsequent to the initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. Our other financial liabilities include trade and other payables.

 

iiFinancial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated uponinitial recognition as FVTPL. Financial liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments (including separated embedded derivatives) held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in profit or loss. We do not have any financial liabilities classified as FVTPL.

 

Derivative financial instruments

 

Initial recognition and subsequent measurement

 

We use derivative financial instruments, such as forward currency contracts, for investment purposes. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss.

 

Leases

 

Finance leases refers to the situation that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards of ownership of the leased asset.

 

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All other leases are treated as operating leases. Where we have use of assets under operating leases, payments made under the leases are charged to profit or loss on a straight line basis over the lease terms except where an alternative basis is more representative of the time pattern of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

 

All of our leases are operating leases for the years ended December 31, 2014, 2013 and 2012.

 

Revenue recognition

 

Revenue comprises the fair value of the consideration received or receivable for the sale of goods, net of rebates and discounts. We paid rebates to some distributors on their annual cash collections in 2012. No such rebates were paid to distributors since year 2013. Provided it is probable that the economic benefits will flow to us and the revenue and costs, if applicable, can be measured reliably, revenue is recognized as follows:

 

·Sales of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing management involvement with the goods and we do not have the obligation to accept the return of the goods to us from the customer.
·Interest income is recognized on a time-proportion basis using the effective interest method.

 

Impairment of non-financial assets

 

Impairment testing is made on our goodwill at each reporting date. Property, plant and equipment and land use rights are tested for impairment if there is any indication that the assets may be impaired at the balance sheet date.

 

If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount.

 

Calculation of recoverable amount

 

An asset’s recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

 

Recognition of impairment losses

 

An impairment loss is recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying amount of the other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

 

Reversal of impairment losses

 

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

 

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognized.

 

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Share-based employee remuneration

 

We operate equity-settled share-based remuneration plans for its employees. None of our plans feature any options for a cash settlement.

 

The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in the share-based payment reserve within equity. The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

 

During the vesting period, the number of share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized in prior years is charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of our shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained earnings).

 

Accounting for income taxes

 

Income tax comprises current tax and deferred tax.

 

Current tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly in equity, respectively.

 

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

 

Deferred tax is calculated using the liability method on temporary differences at the reporting date between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, tax losses available to be carried forward as well as other unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary differences, will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.

 

Deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.

 

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except where we are able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

 

Deferred tax is calculated, without discounting, at tax rates that are expected to apply in the period the liability is settled or the asset realized, based on tax rate (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

 

Additional income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.

 

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Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets are offset against deferred tax liabilities, if we have the legally enforceable right to set off the recognized amounts and the following additional conditions are met:

 

a)in the case of current tax assets and liabilities, we intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or

 

b)in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

 

(i)the same taxable entity; or

 

(ii)different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to settle the liabilities and realize the assets simultaneously.

 

Critical accounting estimates and assumptions

 

We make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

 

Useful lives and impairment assessment of property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.

 

Impairment loss recognized in respect of property, plant and equipment

 

As of December 31, 2014, the carrying amount of property, plant and equipment was approximately RMB 718,418,000 ($115,788,000) (2013: RMB 802,578,000; 2012: RMB 795,983,000). There was no impairment loss recognized for the years ended December 31, 2014, 2013 and 2012. Determining whether property, plant and equipment are impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such estimation was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.

 

Impairment loss recognized in respect of land use rights

 

As of December 31, 2014, the carrying amount of land use rights was approximately RMB 29,259,000 ($4,716,000) (2013: RMB 29,929,000; 2012: RMB 30,598,000). There was no impairment loss recognized for the years ended December 31, 2014, 2013 and 2012. Determining whether land use rights are impaired requires an estimation of the recoverable amount of the land use rights. Such estimation was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.

 

Impairment loss of goodwill

 

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires us to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. We performed goodwill impairment test annually. No impairment loss was recognized for the year ended December 31, 2014, 2013 and 2012.

 

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Income tax

 

We have exposure to income taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The carrying amounts of our income tax payable as of December 31, 2014, 2013 and 2012 were RMB 2,772,000 ($447,000), RMB 1,520,000, and RMB 869,000, respectively.

 

Impairment of trade receivables

 

We assess the collectability of trade receivables. This estimate is based on the credit history of our customers and the current market condition. We assess the collectability of trade receivables at the balance sheet date and make the provision, if any. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in assessing the ultimate realization of these receivables, including the current creditworthiness, past collection history of each customer and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact the carrying value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed. The carrying amounts of our trade receivables as of December 31, 2014, 2013 and 2012 were RMB 549,925,000 ($88,632,000), RMB 490,989,000 and RMB 455,885,000, respectively.

 

Net realizable value of inventories

 

Net realizable value of inventories is the management’s estimation of future selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These estimates are based on the current market condition and the historical experience of selling products of similar nature. It could change significantly as a result of various market factors. The carrying amounts of our inventories as of December 31, 2014, 2013 and 2012 were RMB 330,763,000($53,309,000), RMB 307,436,000 and RMB 290,603,000, respectively.

 

Shares-based payment transaction

 

We measure the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about them.

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.Directors and senior management

 

Our current directors and executive officers are:

 

Name   Age   Position
         
Huang Jia Dong   57   Director and Chief Executive Officer
         
Hen Man Edmund   42   Chief Financial Officer
         
Cheng Yan Davis (1)(2)(3)   73   Director
         
Jianwei Liu (1)(2)(3)   43   Director
         
Shen Chiang Liang (1)(2)(3)   59   Director
         
Su Wei Feng   34   Director and Corporate Secretary

 

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(1)Member of audit committee

 

(2)Member of compensation committee

 

(3)Member of nominations committee

 

Huang Jia Dong founded Hengda in 1993 and has served as our director since November 20, 2009 and Chief Executive Officer since April 4, 2010. Mr. Huang was Chairman of the Board from November 20, 2009 until April 4, 2010. Mr. Huang currently serves as Chairman of Hengda. Mr. Huang was previously involved in the construction material distribution business. Mr. Huang has been appointed as the vice chairman of Fujian Province Ceramic Industry Association since 2006 and the executive director of Jinjiang City Chamber of Import and Export Trade since 2007. Mr. Huang has a diploma in corporate management from Xiamen University. We have chosen Mr. Huang to serve as director because of his extensive experience in the ceramic tiles industry and his intimate knowledge of our company.

 

Hen Man Edmund has served as our Chief Financial Officer since November 20, 2009. Mr. Hen joined Hengda in 2008 as the Chief Financial Officer. Mr. Hen is responsible for the corporate finance function and oversees matters relating to compliance and reporting obligation of our company. Prior to joining Hengda, Mr. Hen was a Financial Controller of a switchgear manufacturer in Sichuan PRC and was responsible for the corporate finance function of the company. Prior to that, Mr. Hen was the accountant of Dickson Concepts (International) Ltd., a public listed company in Hong Kong and oversaw the accounting and financial administration of the company. He also worked at a variety of international accountancy firms, including Deloitte Touche Tohmatsu, in assurance and advisory services during the period from 1995 to 2001. Mr. Hen graduated from the University of East Anglia, United Kingdom, with a Bachelor Degree in Science in 1995. He is a member of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants.

 

Cheng Yan Davis has been our director since November 20, 2009 and was a board member of our predecessor, CHAC, since its inception. Since September 2010, Ms. Davis has acted as a special advisor to the President of the Teacher’s College of Columbia University. From 1993 until September 2010, Ms. Davis served as the Vice Dean of International Programs and Development at the University of Pennsylvania Graduate School of Education (GSE International). GSE International was established by Ms. Davis in 1993, and was the first international programs office among Ivy League graduate schools of education in the U.S. Since 1993, Ms. Davis has served as a Special Advisor to the President of the University of Pennsylvania on internationalization efforts. GSE International has developed many specialized training programs for groups ranging from government officials and university presidents to finance executives and corporate CEOs. Among these programs are training programs for Chief Executive Officers and leading executives in the Chinese securities and mutual fund industries, created in conjunction with the Wharton School. Over the past three years, the Penn-Securities Association of China Program and the Penn-China Mutual Fund CEO Leadership Program have trained over one hundred Chinese executives in the latest theories and practices of the U.S. finance sector. Since 1998, Ms. Davis has worked with Morgan Stanley on the International Conference on Higher Education Management in Shanghai, the establishment of the China Center, which focuses on management training for U.S.-China joint ventures, and the China Pension Program, which works with the state council of China in designing the architecture and training of a senior workforce in comprehensive pension management. Ms. Davis has also worked with CIGNA and Lucent Technologies on various professional education projects since 1997, designing a variety of training and professional development programs. Ms. Davis also serves as an advisor on quality workforce standards for the Shanghai Municipal Government and the Shanghai Foreign Trade Commission. Since 1997, Ms. Davis has been invited to the Shanghai’s Mayor’s International Advisory Council as a special observer and to offer suggestions on Shanghai human resource development and workforce training. Ms. Davis has also been invited to custom design new programs for China Telecom and China Industrial Commercial Bank. These programs were designed in preparation of China’s entry into the World Trade Organization. Ms. Davis initiated former President Jiang Zemin’s visit to the University of Pennsylvania in 1997. Ms. Davis is a board member of the New York Film Academy, Senior Advisor to Motorola and Oracle on international government relations, and Advisor Professor to East China Normal University. In addition, she has served as the Senior Observer for the Shanghai International Business Leaders Advisory Council for the past fifteen years. She has received numerous recognitions for her many contributions, including the first-ever PennGSE Alumni Pioneers Award. Ms. Davis has a degree in Russian and English from Sichuan Foreign Language University in China and an Ed D in Education from the Graduate School of Education at the University of Pennsylvania. We have chosen Ms. Davis to serve as director because of her history with the Company, as a founder of CHAC.

 

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Jianwei Liu has been our director since January 7, 2014. Mr. Jianwei Liu has been a portfolio manager with China-based Bosera Asset Management Co., Ltd. since October 2004. Prior joining to Bosera, Mr. Liu worked at Shanghai AllBright Law Offices and ICBC (Industrial and Commercial Bank of China Ltd.) at their main headquarters beginning in July 1999. Mr. Liu worked with China Holdings Acquisition Corp. (“CHAC”), the Company’s predecessor, prior to its merger with the Company, and participated in the sourcing of targets for CHAC, the performance of due diligence on potential acquisitions and the structuring of the Company’s acquisition of its operating business in 2009. Mr. Liu resides in China and holds an MBA in finance from the Wharton School of the University of Pennsylvania, and an MA degree in English and BA degrees in English and Law from Beijing University.

 

Shen Cheng Liang has been our director since November 1, 2013. Mr. Shen Cheng Liang is a ceramics production expert with over 30 years of experience in the ceramics industry in China. Prior to his retirement from the industry in 2012, he was a senior production engineer and general manager at Fujian Yiyan Ceramics Ltd. where he worked from 1983 to 2012. Mr. Liang graduated with a Bachelor’s degree in material physics from Jingdezhen Ceramics College in 1983.

 

Su Wei Feng has been our director since April 1, 2010. Mr. Su joined us in March 2007. He currently acts as our general legal counsel and Secretary. Prior to working with us, Mr. Su worked as a lawyer at Fujian Minrong Law Firm from 2005 to 2007. He graduated from the School of Law of Xiamen University in 2004. We have chosen Mr. Su to serve as director because of his legal background.

 

The business address of each party described above is c/o Jinjiang Hengda Ceramics Co., Ltd., Junbing Industrial Zone, Anhai, Jinjiang City, Fujian Province, People’s Republic of China.

 

B.Compensation

 

Compensation Committee Interlocks and Insider Participation

 

No member of our compensation committee has at any time been our officer or employee, or our subsidiaries. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

 

During the last fiscal year, none of our officers and employees, and none of our former officers participated in deliberations of our Board of Directors concerning executive officer compensation.

 

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Director Compensation

 

Starting April 1, 2010, our Board of Directors determined to provide its non-employee members annual compensation of $40,000 and to provide the Audit Committee Chair annual compensation of $45,000.

 

The following table sets forth all of the compensation paid by us or our significant subsidiaries in 2014 to each of our non-employee directors for such person’s service as a director (including contingent or deferred compensation accrued during 2014):

 

Name and Principal Position  Compensation RMB   Value of
Options(1)
RMB		   Total RMB 
Shen Cheng Liang   231,000    -    231,000 
Cheng Yan Davis   248,184    -    248,184 
William L. Stulginsky (resigned on April 27, 2014)   139,604    -    139,604 
Jianwei Liu   268,870    -    268,870 

 

(1)No options were granted to non-employee directors in 2014.

 

Executive Officers

 

The following table sets forth all of the compensation paid by us or our significant subsidiaries in 2014 to each of our officers for such person’s service as an officer (including contingent or deferred compensation accrued during 2014 but not including any amounts paid to such persons for their services as directors):

 

The following table sets forth all of the compensation paid by us or our significant subsidiaries in 2014 to each of our officers for such person’s service as an officer (including contingent or deferred compensation accrued during 2014 but not including any amounts paid to such persons for their services as directors):

 

   Salary   Bonus  

Value of
Options(1)

   Total 
Name and Principal Position  RMB   RMB   RMB   RMB 
Huang Jia Dong, Chief Executive Officer   128,956    -    -    128,956 
Su Wei Feng, Director and Corporate Secretary   86,327    -    -    86,327 
Hen Man Edmund, Chief Financial Officer   363,337    -    -    363,337 
Su Pei Zhi, Sales Deputy General Manager   152,061    -    -    152,061 

 

(1)No options were granted to our executives in 2014.

 

Retirement Benefits

 

As of December 31, 2014, we have contributed to the government-mandated employee welfare and retirement benefit plan and provided pension, retirement or similar benefits to its employees. The PRC regulations require us to pay the local labor administration bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The local labor administration bureau, which manages various investment funds, will take care of employee retirement, medical and other fringe benefits. We have no further commitments beyond our monthly contribution.

 

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Employment Agreements

 

Upon consummation of the acquisition of Success Winner, we entered into employment agreements with certain of our executive officers. The following discussion summarizes the material terms of employment agreements entered into between us and our executive officers:

 

We entered into employment agreements with the following officers: Huang Jia Dong, Chief Executive Officer, Su Pei Zhi, Sales Deputy General Manager, Hen Man Edmund, Chief Financial Officer, and Su Wei Feng, Corporate Secretary.

 

·The term of the employment agreements is three years (February 1, 2013 to January 31, 2016 for Huang Jia Dong and Su Wei Feng and August 1, 2012 to July 31, 2015 for Hen Man Edmund) and August 1, 2013 to January 31, 2014 for Su Pei Zhi.

 

·Since August 1, 2013, Huang Jia Dong received compensation of RMB 12,000 per month; Su Pei Zhi received compensation of RMB 16,000 per month; Hen Man Edmund received compensation of RMB 38,000 per month; and Su Wei Feng received compensation of RMB 8,100 per month.

 

·We may dismiss any of the above officers if any of the following events occurs with respect to the officer: (1) failure to show up for work, (2) failure to provide required documents, (3) falsification of documents, criminal record, etc., (4) serious violation of such officers’ labor rules and of regulations, (5) serious lapse of duties and responsibilities, (6) activities that violate regulations, resulting in loss of more than RMB 4,000, (7) operation of his own business during the term of his employment, (8) criminal prosecution and labor punishment, (9) request by the officer to resign, (10) causing us to sign or change any contract through fraud, coercion and other fraudulent means, or (11) other situations stipulated by law and statutes.

 

·Each officer is subject to the non-compete provisions of the agreement for a period of three years following termination of the employment agreement and non-solicitation provisions of the agreement for a period of two years following termination of the employment agreement.

 

Other Employees

 

Compensation for our senior executives is comprised of four elements: a base salary, an annual performance bonus, equity and benefits.

 

In developing salary ranges, potential bonus payouts, equity awards and benefit plans, it is anticipated that our compensation committee takes into account: 1) competitive compensation among comparable companies and for similar positions in the market, 2) relevant ways to incentivize and reward senior management for improving shareholder value while building a successful company, 3) individual performance, 4) how best to retain key executives, 5) the overall performance of us and our various key component entities, 6) our ability to pay and 7) other factors deemed to be relevant at the time.

 

Our senior management have discussed our above mentioned planned process for executive compensation and the four compensation components. Specific compensation plans for our key executives are negotiated and established by our compensation committee.

 

We have not entered into any service contracts with any of our officers, directors or employees that contain any provisions for benefits upon termination of employment.

 

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China Ceramics Co., Ltd. 2010 Incentive Compensation Plan

 

On December 27, 2010, our shareholders approved the 2010 Incentive Plan. The purpose of the 2010 Incentive Plan is to assist us and our subsidiaries in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, and independent contractors by enabling such persons to acquire or increase a proprietary interest in us in order to strengthen the mutuality of interests between such persons and our shareholders, and providing such persons with annual and long-term performance incentives to expand their maximum efforts in the creation of shareholder value.  Awards under the 2010 Incentive Plan will be limited in the aggregate to 1,200,000 shares. The 2010 Incentive Plan shall terminate at such time as no shares remain available for issuance under the 2010 Incentive Plan, when we have no further obligations with respect to outstanding awards under the 2010 Incentive Plan. As of December 31, 2014, 1,130,000 stock options under the 2010 Incentive Plan have been granted.

 

Administration. The 2010 Incentive Plan is administered by a committee (the “Committee”) designated by our board of directors (the “Board”), which shall consist of at least two directors, each of whom is (i) a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and (ii) an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto (the “Code”); provided, however, that except as otherwise expressly provided in the 2010 Incentive Plan or in order to comply with Code Section 162(m) or Rule 13b-3 under the Exchange Act, the Board may exercise any power or authority granted to the Committee under the 2010 Incentive Plan. Among other things, the Committee has complete discretion, subject to the express limits of the 2010 Incentive Plan, to determine the officers, directors, employees and independent contractors to be granted an award, the type of award to be granted, the number of shares subject to each award, the terms and conditions of each award, the exercise price of each award which is a stock option (“Option”) and the base price of each award which is a stock appreciation right (“SAR”), the term of each award, the vesting schedule for an award, whether to accelerate award vesting, the value of the Shares underlying an award, and the required withholdings, if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating to the 2010 Incentive Plan. Notwithstanding the foregoing, neither the Committee nor the Board has any authority to grant or modify an award under the 2010 Incentive Plan with terms or conditions that would cause the award to be considered nonqualified “deferred compensation” subject to Code Section 409A.

 

Grant of Awards; Shares Available for Awards. The 2010 Incentive Plan provides for the grant of Options (both incentive stock options and non-incentive stock options), SARs (including limited SARs), restricted stock, deferred stock, stock granted as a bonus or in lieu of another award, dividend equivalents, bonus stock, awards in lieu of obligations, and performance or annual incentive awards (each an “award”) to our executive officers, directors and employees, and independent contractors (each a “participant”) (however, solely employees are eligible for awards which are incentive stock options). We have reserved a total of 1,200,000 shares for issuance as or under awards to be made under the 2010 Incentive Plan.  If any award lapses, expires, is cancelled, or terminates unexercised or ceases to be exercisable for any reason, the number of shares subject thereto is again available for grant under the 2010 Incentive Plan. The number of shares for which awards which are Options, SARs, performance awards or annual incentive awards may be granted to a participant under the 2010 Incentive Plan in any fiscal year is limited to 350,000.

 

The number of awards to be granted to officers, directors, employees and consultants cannot be determined at this time as the grant of awards is dependent upon various factors such as hiring requirements and job performance.

 

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Options. The exercise price per share purchasable under an Option shall be determined by the Committee or the Board, provided that such per share exercise price shall not be less than 100% of the fair market value of a share on the date of grant of the Option and shall not, in any event, be less than the par value of a share on the date of grant of such option. The Committee or the Board shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part, the time or times at which Options shall cease to be or become exercisable following termination of employment or upon other conditions, the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, and the methods by or forms in which shares will be delivered or deemed to be delivered to participants who exercise Options.

 

Options which are incentive stock options (“ISOs”) granted under the 2010 Incentive Plan shall comply in all respects with Code Section 422. In the case of ISOs, if an employee owns or is deemed to own (by reason of the attribution rules applicable under Code Section 424(d)) more than 10% of the combined voting power of all classes of our shares or the shares of any parent or subsidiary (a “ten percent shareholder”) and an ISO is granted to such employee, the per share exercise price under such ISO (to the extent required by the Code at the time of grant) shall be no less than 110% of the fair market value of a share on the date such ISO is granted. The term of an ISO may not exceed 10 years (5 years in the case of an ISO granted to a ten percent shareholder). ISOs may be granted to solely employees. In addition, the aggregate fair market value of the shares subject to an ISO (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000.

 

Stock Appreciation Rights. A SAR provides the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the fair market value of the number of shares subject to the SAR on the date of exercise (or, in the case of a “Limited SAR” (as defined in the 2010 Incentive Plan) which may be exercised only in the event of a “change in control” (as defined in the 2010 Incentive Plan), the fair market value determined by reference to the change in control price, as defined in the 2010 Incentive Plan), over (B) the product of the number of shares subject to the SAR multiplied by the grant price under the SAR, as determined by the Committee or the Board. The per share grant price of a SAR shall not be less than the fair market value of a share on the date of grant.

 

Restricted Stock Awards. A restricted stock award is a grant or sale of shares to the participant, subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee or the Board may determine at the date of grant or purchase or thereafter. Except to the extent restricted under the terms of the 2010 Incentive Plan and any agreement relating to the restricted stock award, a participant who is granted or has purchased restricted stock shall have all of the rights of a shareholder, including the right to vote the restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee or the Board). During the restricted period applicable to the restricted stock, subject to certain exceptions, the restricted stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the participant.

 

Deferred Stock. A deferred stock award is a right to receive shares, cash, or a combination thereof at the end of a specified deferral period, subject to certain terms and conditions, and in compliance with Code Section 409A. Payment under an award of deferred stock shall occur upon expiration of the deferral period specified for such deferred stock award by the Committee or the Board (or, if permitted by the Committee or the Board, as elected by the participant). In addition, deferred stock awards shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee or the Board may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee or the Board may determine. Payments under deferred stock awards may be by delivery of Shares, cash equal to the fair market value of the specified number of shares covered by the deferred stock award, or a combination thereof, as determined by the Committee or the Board at the date of grant or thereafter. Prior to the end of the specified deferral period for a deferred stock award, the award carries no voting or dividend or other rights associated with share ownership.

 

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Bonus Shares and Awards in Lieu of Obligations. The Committee and the Board are each authorized to grant shares as a bonus, or to grant shares or other awards in lieu of our obligations to pay cash or deliver other property under the 2010 Incentive Plan or under other plans or compensatory arrangements, provided that, in the case of participants subject to Section 16 of the Exchange Act, the amount of such grants remains within the discretion of the Committee to the extent necessary to ensure that acquisitions of shares or other awards are exempt from liability under Section 16(b) of the Exchange Act. These bonus shares or awards granted under the 2010 Incentive Plan shall be subject to such other terms as shall be determined by the Committee or the Board.

 

Dividend Equivalents. The Committee and the Board are each authorized to grant dividend equivalents to a participant, entitling the participant to receive cash, shares, other awards, or other property equal in value to dividends paid with respect to a specified number of Shares, or other periodic payments. Dividend equivalents may be awarded on a free-standing basis or in connection with another award. The Committee or the Board may provide that dividend equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional shares, awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee or the Board may specify.

 

Other Stock-Based Awards. The Committee and the Board are each authorized, subject to limitations under applicable law, to grant to participants such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, shares, as deemed by the Committee or the Board to be consistent with the purposes of the 2010 Incentive Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares, purchase rights for shares, awards with value and payment contingent upon our performance or any other factors designated by the Committee or the Board, and awards valued by reference to the book value of shares or the value of securities of or the performance of our specified subsidiaries or business units.

 

Performance and Annual Incentive Awards.  The Committee and the Board (except for such awards to be made to participants who are “covered employees” for purposes of Code Section 162(m), which awards must be made by the Committee) are each authorized to grant (i) performance awards, under which participants will receive cash payments, shares or other awards upon the satisfaction of pre-specified (generally, other than annual) performance criteria, and (ii) annual incentive awards, under which participants will receive cash payments, shares or other awards upon the satisfaction of pre-specified annual performance criteria.  The performance criteria which may be used for performance awards or annual incentive awards made to participants who are “covered employees” for purposes of Code Section 162(m) may solely include, for us, on a consolidated basis and/or our specified subsidiaries or business units (except with respect to total shareholder return and earnings per share criteria) - total shareholder return; total shareholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock Index or the S&P Specialty Retailer Index; net income; pretax earnings; earnings before interest expense, taxes, depreciation and amortization; pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; operating margin; earnings per share; return on equity; return on capital; return on investment; operating earnings; working capital or inventory; and ratio of debt to shareholders’ equity.

 

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Change in Control Provisions. In the event of a change in control (as defined in the 2010 Incentive Plan), (i) any award subject to vesting and exercisability requirements that was not previously vested and exercisable shall become fully vested and exercisable as of the occurrence of the change in control, subject to certain restrictions; (ii) Limited SARs (and other SARs if so provided by their terms) shall become exercisable for amounts, in cash, determined by reference to the change in control price; (iii) the restrictions, deferral of settlement, and forfeiture conditions applicable to any other award shall lapse and such awards shall be deemed fully vested as of the occurrence of the change in control, except to the extent of any waiver by the participant and subject to certain restrictions; (iv) with respect to any outstanding award subject to achievement of performance goals and conditions under the 2010 Incentive Plan, such performance goals and other conditions will be deemed to be met if and to the extent so provided by the Committee in the award agreement relating to such award; (v) the Board may in its sole and absolute discretion, provide on a case by case basis that Options shall terminate, provided however, that a participant holding a terminating Option shall have the right, immediately prior to the occurrence of such change in control and during such period as the Board in its sole discretion shall determine and designate, to exercise that Option, to the extent exercisable, in whole or in part; and (vi) the Board may in its sole and absolute discretion, provide on a case by case basis that any award entitled to be settled in shares shall instead be entitled to be settled, during such period as the Board in its sole discretion shall determine and designate, by means of a cash payment equal to the fair market value of such award immediately prior to the occurrence of such change in control, as determined in good faith by the Board.

 

Amendment and Termination. The Board may amend, alter, suspend, discontinue or terminate the 2010 Incentive Plan, or the Committee’s authority to grant awards under the 2010 Incentive Plan, without the consent of shareholders or participants, except that any amendment or alteration to the 2010 Incentive Plan shall be subject to the approval of the Company’s shareholders not later than the annual meeting next following such Board action if such shareholder approval is required by any federal or state law or regulation (including, without limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to the 2010 Incentive Plan to shareholders for approval; provided that, without the consent of an affected participant, no such Board action may materially and adversely affect the rights of such participant under any previously granted and outstanding award. The Committee or the Board may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any award theretofore granted and any award agreement relating thereto, except as otherwise provided in the 2010 Incentive Plan; provided that, without the consent of an affected participant, no such Committee or the Board action may materially and adversely affect the rights of such participant under such award.

 

Compensation Committee. The shareholders of the Company approved the 2010 Incentive Plan at the annual meeting held on December 27, 2010. In accordance with the 2010 Incentive Plan, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”) to administer the 2010 Incentive Plan. The Company granted an aggregate of 1,130,000 stock options to Huang Jia Dong, Su Pei Zhi, Su Wei Feng, Hen Man Edmund, Paul K. Kelly, Cheng Yan Davis, Ding Wei Dong and William L. Stulginsky, upon the approval by the Board of Directors on January 27, 2011, the grant date. The exercise price of the share options granted is $7.65 per share and the share options are valid for a period of 5 years from January 27, 2011 to January 27, 2016. One-fourth of options granted will vest in every year from the grant date. As at the grant date of January 27, 2011, the estimated total fair value of the options granted is $3,977,600.

 

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Certain U.S. Federal Income Tax Consequences of the 2010 Incentive Plan

 

The following is a general summary of the U.S. federal income tax consequences under current tax law to China Ceramics, were it subject to U.S. federal income taxation on a net income basis, and to participants under the 2010 Incentive Plan who are individual citizens or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of Options, which include ISOs and Options that are not ISOs, SARs, restricted stock, deferred stock, performance shares, performance units, restricted stock units, dividend equivalent rights and bonus stock. It does not purport to cover all of the special rules that may apply, including special rules relating to limitations on the ability of China Ceramics to deduct certain compensation, special rules relating to deferred compensation, golden parachutes, participants subject to Section 16(b) of the Exchange Act and the exercise of an Option with previously-acquired shares. This summary assumes that U.S. participants will hold their shares as capital assets within the meaning of Section 1221 of the Code. This summary does not address the application of the passive foreign investment company rules of the Code to U.S. participants. These rules are discussed generally under the section below entitled “Taxation–United States Federal Income Taxation–U.S. Holders–Passive Foreign Investment Company Rules”. In addition, this summary does not address the foreign, state or local income or other tax consequences, or any U.S. federal non-income tax consequences, inherent in the acquisition, ownership, vesting, exercise, termination or disposition of an award under the 2010 Incentive Plan or shares issued pursuant thereto. Participants are urged to consult their own tax advisors concerning the tax consequences to them of an award under the 2010 Incentive Plan or shares issued pursuant thereto.

 

A U.S. participant generally does not recognize taxable income upon the grant of an option. Upon the exercise of an Option that is not an ISO, the participant generally recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the shares acquired on the date of exercise over the exercise price therefor, and China Ceramics would be entitled to a deduction for such amount at that time. If the U.S. participant later disposes of the shares acquired under an Option that is not an ISO, the U.S. participant generally recognizes a long-term or short-term gain or loss, depending upon the period for which the shares were held thereby. A long-term capital gain generally is subject to more favorable tax treatment than ordinary income or a short-term capital gain. The deductibility of capital losses is subject to certain limitations.

 

Upon the exercise of an ISO, a U.S. participant generally does not recognize taxable income. If the U.S. participant disposes of the shares acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of the shares to the participant, the U.S. participant generally recognizes a long-term capital gain or loss, and China Ceramics would not be entitled to a deduction. However, if the U.S. participant disposes of such shares prior to the end of the required holding period, all or a portion of the gain is treated as ordinary income, and China Ceramics generally would be entitled to deduct such amount.

 

In addition to the U.S. federal income tax consequences described above, the U.S. participant may be subject to the alternative minimum tax (“AMT”), which is payable to the extent it exceeds the participant’s regular income tax. For this purpose, upon the exercise of an ISO, the excess of the fair market value of the shares for which the ISO is exercised over the exercise price thereunder for such shares is a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such shares is increased by such excess for purposes of computing the gain or loss on the disposition of the shares for AMT purposes. If a U.S. participant is required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including any ISO adjustment) generally may be allowed as a credit against the participant’s regular income tax liability (and, in certain cases, may be refunded to the participant) in subsequent years. To the extent the credit is not used, it may be carried forward.

 

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A U.S. participant who receives a restricted stock award or who purchases shares of restricted stock, which shares, in either case, are subject to a substantial risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of the award or the purchased restricted shares and generally recognizes ordinary compensation income at the time the restrictions lapse in an amount equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the U.S. participant for the shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted shares based on the value of the shares at the time of receipt. China Ceramics generally would be entitled to deduct such amount at the same time as ordinary compensation income is required to be included by the U.S. participant and in the same amount. Dividends received with respect to restricted shares generally are treated as compensation, unless the U.S. participant elects to be taxed on the receipt (rather than the vesting) of the restricted shares.

 

A U.S. participant generally does not recognize income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation income upon the exercise of the SAR equal to the increase in the value of the underlying shares, and China Ceramics generally would be entitled to a deduction for such amount.

 

A U.S. participant generally does not recognize income on the receipt of a deferred stock award or a bonus stock award and generally recognizes income when the shares are received. At such time, the U.S. participant recognizes ordinary compensation income equal to the excess, if any, of the fair market value of the shares over any amount paid for the shares, and China Ceramics generally would be entitled to deduct such amount at such time.

 

A U.S. participant generally does not recognize income on the receipt of a performance award, annual incentive award or dividend equivalent right award until a payment is received under the award.  At such time, the U.S. participant recognizes ordinary compensation income equal to the amount of any cash payments and the fair market value of any shares received, and China Ceramics generally would be entitled to deduct such amount at such time.

 

C.Board Practices

 

The term of each director is until their resignation or removal.

 

Our board of directors has established an audit committee, a compensation committee and a governance and nominating committee.

 

Audit Committee.  The audit committee consists of Jianwei Liu, Cheng Yan Davis and Shen Chiang Liang. Mr. Liu is the chair of the audit committee, and our board of directors believes that Mr. Liu qualifies as an “audit committee financial expert”, as such term is defined in the rules of the Securities and Exchange Commission.

 

The board of directors has adopted an audit committee charter, providing for the following responsibilities of the audit committee:

 

·appointing and replacing our independent auditors and pre-approving all auditing and permitted non-auditing services to be performed by the independent auditors;

 

·reviewing and discussing the annual audited financial statements with management and the independent auditors;

 

·annually reviewing and reassessing the adequacy of our audit committee charter;

 

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·such other matters that are specifically delegated to our audit committee by our board of directors from time to time;

 

·meeting separately and periodically with management, the internal auditors and the independent auditors; and

 

· reporting regularly to the board of directors.

 

A copy of the audit committee charter is available on our website at http://cceramics.com/Corporate-Governance.html.

 

Compensation Committee.  Our compensation committee consists of Jianwei Liu, Shen Cheng Liang and Cheng Yan Davis. Shen Cheng Liang is the chair of our compensation committee. Jianwei Liu, Shen Cheng Liang and Cheng Yan Davis do not have any direct or indirect material relationship with us other than as a director.

 

Our board of directors adopted a compensation committee charter, providing for the following responsibilities of the compensation committee:

 

·reviewing and making recommendations to the board regarding our compensation policies and forms of compensation provided to our directors and officers;

 

·reviewing and making recommendations to the board regarding bonuses for our officers and other employees;

 

·administering our incentive-compensation plans for our directors and officers;

 

·reviewing and assessing the adequacy of the charter annually;

 

·administering our share option plans, if they are established in the future, in accordance with the terms thereof; and

 

·such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

 

A copy of the compensation committee charter is available on our website at http://cceramics.com/Corporate-Governance.html.

 

Governance and Nominating Committee.  Our governance and nominating committee consists of Jianwei Liu, Shen Cheng Liang and Cheng Yan Davis. Shen Cheng Liang is the chair of our governance and nominating committee. Jianwei Liu, Shen Cheng Liang and Cheng Yan Davis do not have any direct or indirect material relationship with us other than as a director.

 

Our board of directors adopted a governance and nominating committee charter, providing for the following responsibilities of the governance and nominating committee:

 

·overseeing the process by which individuals may be nominated to our board of directors;

 

·identifying potential directors and making recommendations as to the size, functions and composition of our board of directors and its committees;

 

·reviewing candidates proposed by our shareholders;

 

·developing the criteria and qualifications for the selection of potential directors; and

 

·making recommendations to the board of directors on new candidates for board membership.

 

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A copy of the governance and nominating committee charter is available on our website at http://cceramics.com/Corporate-Governance.html.

 

In making nominations, the governance and nominating committee is required to submit candidates who have the highest personal and professional integrity, who have demonstrated exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the board, in collectively serving the long-term interests of the shareholders. In evaluating nominees, the governance and nominating committee is required to take into consideration the following attributes, which are desirable for a member of the board: leadership, independence, interpersonal skills, financial acumen, business experiences, industry knowledge, and diversity of viewpoints.

 

Code of Ethics

 

In May 2010, our board of directors adopted a code of ethics that applies to our directors, officers and employees. Our code of ethics is available on our website at http://cceramics.com/Corporate-Governance.html.

 

Director Independence

 

Our board of directors has determined that Messrs. Jianwei Liu, Shen Cheng Liang and Ms. Cheng Yan Davis qualify as independent directors under the rules of the Nasdaq Marketplace Rules because they are not currently employed by us, and do not fall into any of the enumerated categories of people who cannot be considered independent in the Nasdaq Marketplace Rules.

 

D.Employees

 

The table below provides information as to the total number of employees at the end of the last three fiscal years. We reduced our employees in 2014 due to the reduction in the facilities that were being operated. We have no contracts or collective bargaining agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our employees to be good.

 

   2012   2013   2014 
Number of Employees   2,297    1,710    1,606 

 

E.Share Ownership

 

See Item 7 below.

 

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.Major shareholders

 

The following table sets forth, as of April 17, 2015, certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially own more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive officers, and all directors and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated. Our major shareholders do not have different voting rights than any other holder of our shares.

 

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Shares which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and investment power. Except as otherwise indicated below, each beneficial owner holds voting and investment power directly. The percentage of ownership is based on 20,430,838 shares issued and outstanding as of April 17, 2015.

 

Name(1)  Number of Shares
Beneficially Owned		   Percentage of
Ownership		 
Shen Cheng Liang   0    0 
Cheng Yan Davis (2)   109,750(3)   * 
Huang Jia Dong   8,345,308(4)   40.26%
Jianwei Liu   0    0 
Su Wei Feng   200,000(5)   * 
Hen Man Edmund   358,000(6)   1.72%
All directors and executive officers as a group (8 individuals)   9,013,058    42.27%
Sound Treasure Limited   5,212,905(7)   25.51%
James D. Dunning, Jr.   1,101,251(8)   5.39%
Alan G. Hassenfeld   1,101,251(8)   5.39%
Gregory E. Smith   1,101,251(8)   5.39%
Prescott Group Capital Management, L.L.C.   1,857,677(9)   9.09%
Prescott Group Aggressive Small Cap, L.P.   1,857,677(9)   9.09%
Prescott Group Aggressive Small Cap II, L.P.   1,857,677(9)   9.09%
Phil Frohlich   1,857,677(9)   9.09%

 

*Less than 1%

 

(1)Unless otherwise indicated, the business address of each of the individuals is c/o Jinjiang Hengda Ceramics Co., Ltd.; Junbing Industrial Zone; Anhai, Jinjiang City; Fujian Province, PRC.

 

(2)Cheng Yan Davis’s address is 160 Riverside Blvd, New York NY.

 

(3)Includes 40,000 shares underlying options. The options are currently exercisable for $7.65 per ordinary share and expire on January 27, 2016.

 

(4)Includes (i) an aggregate of 2,682,403 ordinary shares owned by Mr. Huang’s spouse and children for which Mr. Huang may be deemed to be the beneficial owner but for which Mr. Huang disclaims any beneficial ownership, (ii) 5,212,905 shares owned by Sound Treasure Limited, an entity of which Mr. Huang is the sole director and shareholder, and (iii) 300,000 shares underlying options that are currently exercisable for $7.65 per ordinary share and expire on January 27, 2016.

 

(5)Consists of 200,000 shares underlying options. The options are currently exercisable for $7.65 per ordinary share and expire on January 27, 2016.

 

(6)Includes 350,000 shares underlying options. The options are currently exercisable for $7.65 per ordinary share and expire on January 27, 2016.

 

(7)Huang Jia Dong is the sole director and shareholder of Sound Treasure Limited.

 

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(8)Based on a Schedule 13D/A filed with the Securities and Exchange Commission on October 28, 2011 filed by James D. Dunning, Alan G. Hassenfeld, and Gregory E. Smith, who are parties to a voting agreement dated November 20, 2009. Consists of 663,693 shares owned by Mr. Dunning, 348,656 shares owned by Mr. Hassenfeld, and 88,902 shares owned by Mr. Smith. The business address of Mr. Dunning is 2 Sutton Place South, Apt. 17D, New York, NY 10022. The business address of Mr. Hassenfeld is c/o Hassenfeld Family Initiatives; The Owen Building; 101 Dyer Street, Suite 401; Providence, RI 02903. The business address of Mr. Smith is 1401 NE 70th Street; Oklahoma City, OK 73111.

 

(9)Based on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2014 filed Prescott Group Capital Management, L.L.C., an Oklahoma limited liability company (“Prescott Capital”), Prescott Group Aggressive Small Cap, L.P., an Oklahoma limited partnership (“Prescott Small Cap”), Prescott Group Aggressive Small Cap II, L.P., an Oklahoma limited partnership (“Prescott Small Cap II” and, together with Prescott Small Cap, the “Small Cap Funds”), and Mr. Phil Frohlich, the principal of Prescott Capital. The Small Cap Funds and Mr. Phil Frohlich are the beneficial owners of 1,857,677 Shares. The business address of each of the beneficial owners is 1924 South Utica, Suite 1120 Tulsa, Oklahoma 74104-6529.

 

Our officers, directors, employees and independent contractors are eligible to receive awards under the 2010 Incentive Plan, as described under the section titled “6.B Compensation–China Ceramics Co., Ltd. 2010 Incentive Compensation Plan.”

 

B.Related Party Transactions

 

Related Party Transactions of CHAC

 

Pursuant to a registration rights agreement between us and certain of our officers and directors, we must use our best efforts to cause a registration statement relating to the resale of certain securities owned by them to be declared effective and, once effective, only to use our best efforts to maintain the effectiveness of the registration statement. A registration statement pursuant to these rights is currently effective.

 

Related Party Transactions of China Ceramics and Operating Predecessor

 

Mr. Huang Jia Dong, the founder and Chairman of Hengda and our Chief Executive Officer and one of our directors, and a holder approximately 40.3% of our shares as of April 17, 2015, and Mr. Wong Kung Tok, formerly one of our significant shareholders, provide working capital loans to us from time to time during the normal course of our business. These loans amounted to RMB 4,796,000, RMB 8,539,000, and RMB 24,902,000 ($4,013,000) in 2012, 2013, and 2014, respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law. In July 2014, an entity affiliated with Mr. Huang assumed RMB 20.7 million in loans due from us to Mr. Wong and then forgave those loans (see below).

 

Pursuant to an administrative services agreement dated as of December 1, 2009 between us and Stuart Management Co., an affiliate of Paul K. Kelly, an ex-director who resigned on Nov 27, 2013, we paid $7,000 (equivalent to RMB 44,000) a month plus out-of-pocket expenses to Stuart Management Co. for administrative services. The initial one-year term began on December 1, 2009, and the agreement automatically renews for successive one-year terms unless either party notifies the other of its intent not to renew. During the term of the agreement, Stuart Management Co. will provide us with general administrative services, including acting as our administrative agent in the United States and the British Virgin Islands, and allow us to utilize certain of its office space for meetings. The agreement was renewed to reduce the amount to $4,900 (equivalent to RMB 30,000) a month in December 2013. The amount was further reduced to $1,000 (equivalent to RMB 6,000) a month commencing from October 2014.

 

Mr. Huang Jia Dong and Su Pei Zhi, a sales deputy general manager whose wife is Mr. Huang’s second cousin, provide guarantees to us for certain bank loans. The guarantees amounted to RMB 180,000,000, RMB 102,800,000 and RMB 102,800,000 ($16,568,000) as of December 31, 2012, 2013 and 2014, respectively.

 

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Other Related Party Transactions

 

During 2013 and 2014, we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to the fluctuation in value of the Renminbi against the U.S. dollar. We recorded fair value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 59,477,000 ($9,586,000) from January 1 to July 31, 2014 in connection with these agreements.

 

In June 2014, we, our Chief Executive Officer and the Audit Committee set out to attempt to terminate the foreign currency transaction agreements; and to reach a resolution that would preclude the depletion of our liquid assets by virtue of our having entered into the foreign currency transaction agreements. Ultimately our Chief Executive Officer agreed to cause an entity controlled by him to assume those agreements. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, executed an agreement (the “Novation”) with us and the financial institution that originated the foreign currency transaction agreements pursuant to which Sound Treasure Limited assumed the foreign currency transaction agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under the foreign currency transaction agreements. As a result, we will not be required to fund any losses related to these agreements, and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.

 

At the time that each of the foreign currency transaction agreements was established with the financial institution, we were required to deposit monies with the financial institution that was the counterparty to the agreements. RMB 6.7 million of a total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the brother-in-law of our Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong Kung Tok as of July 9, 2014. In connection with the Novation discussed above, our Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok executed an agreement with the Company on July 31, 2014 (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by us to Wong Kung Tok were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited, and in return the Company agreed to forego any claim to RMB 15.6 million in deposits under the foreign currency transaction agreements which were transferred to Sound Treasure Limited pursuant to the Novation.

 

Except as disclosed above, neither our Chief Executive Officer nor any affiliate of our Chief Executive Officer received any remuneration for agreeing to assume the foreign currency transaction agreements.

 

C.Interests of Experts and Counsel

 

Not required.

 

ITEM 8.FINANCIAL INFORMATION

 

A.Consolidated Statements and Other Financial Information.

 

See Item 18. for our audited consolidated financial statements.

 

Legal Proceedings

 

On June 6, 2014, a putative class action complaint (the “Pollock Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Robert Pollock, Individually and On Behalf Of All Others Similarly Situated v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng, Shen Cheng Liang, Jianwei Liu, And China Ceramics Co., Ltd. (Case No. 14-cv-4100).

 

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On June 16, 2014, a putative class action complaint (the “Artinoff Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims of violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Roger Artinoff, Individually and On Behalf Of All Others Similarly Situated v. China Ceramics Co. Ltd., Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky And Su Wei Feng. (Case No. 14-cv-4312).

 

On July 2, 2014, a putative class action complaint (the “Finlayson Complaint”) was filed in the United States District Court for the Southern District of New York against us and various current and former directors and officers asserting claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, and claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act. The complaint is captioned Richard Finlayson, Individually and On Behalf Of All Others Similarly Situated v. Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng, Shen Cheng Liang, Jianwei Liu, and China Ceramics Co., Ltd. (Case No. 14-cv-4997).

 

On February 6, 2015, we and the individual defendants reached an agreement in principle to settle the above-described cases as against all defendants in consideration of the payment by us of a combination of cash and our common stock. The settlement is subject to the execution of a mutually acceptable settlement agreement and the approval of the settlement by the Court.

 

Dividend Policy

 

Our Board of Directors has the discretion to pay dividends. The form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. Although we have paid dividends in the past, there is no assurance that we will continue to pay dividends in the future.

 

On February 25, 2014, we announced two semi-annual cash dividends of $0.0125 per share each. The first dividend of $0.0125 per share was paid on July 14, 2014 and the second of $0.0125 per share was paid on January 14, 2015, with record dates of June 13, 2014 and December 12, 2014, respectively.

 

We are a holding company incorporated in the British Virgin Islands. We rely on dividends paid by our Hong Kong and Chinese subsidiaries for our cash needs. The payment of dividends by entities organized in China is subject to limitations. If the Boards of our Chinese subsidiaries decide to pay dividends in the future, these restrictions may impede our ability to pay dividends and/or the amount of dividends we could pay. In addition, if our Chinese subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

 

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B.Significant Changes

 

Except as disclosed elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this Annual Report.

 

ITEM 9.THE OFFER AND LISTING

 

A.Offer and Listing Details

 

The following tables set forth, for the calendar quarters indicated and through March 31, 2015, the quarterly high and low sale prices for our shares, as reported on NASDAQ Stock Market, the OTC Bulletin Board or the NYSE Amex, as applicable. The OTC Bulletin Board market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

 

   Shares 
   High   Low 
Annual Highs and Lows          
2010   10.10    5.05 
2011   8.48    2.45 
2012   4.25    1.33 
2013   4.06    1.90 
2014   2.50    0.71 
Quarterly Highs and Lows          
2013          
First Quarter   3.44    2.05 
Second Quarter   2.53    1.90 
Third Quarter   3.34    1.93 
Fourth Quarter   4.06    1.93 
2014          
First Quarter   2.41    1.60 
Second Quarter   1.69    1.30 
Third Quarter   1.33    0.76 
Fourth Quarter   0.99    0.71 
2015          
First Quarter   1.24    1.00 
Monthly Highs and Lows          
September 2014   1.14    0.97 
October 2014   0.99    0.71 
November 2014   0.94    0.80 
December 2014   0.94    0.77 
January 2015   0.90    0.75 
February 2015   1.04    0.81 
March 2015   1.24    1.00 

 

B.Plan of Distribution

 

Not Applicable.

 

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C.Markets

 

Our shares have been listed on the NASDAQ Global Market under the symbols CCCL, since January 18, 2011. Our shares were listed on the NASDAQ Capital Market from November 3, 2010 through January 17, 2011. The shares were previously quoted on the OTC Bulletin Board from December 29, 2009 through November 2, 2010. Prior to December 29, 2009, our shares were traded on NYSE Amex, under the symbols “HOL.” CHAC’s shares commenced to trade on December 17, 2007.

 

D.Selling Shareholders

 

Not Applicable.

 

E.Dilution

 

Not Applicable.

 

F.Expenses of the Issue

 

Not Applicable.

 

ITEM 10.ADDITIONAL INFORMATION

 

A.Share Capital

 

Not Applicable.

 

B.Memorandum and Articles of Association

 

The information required by Item 10.B of Form 20-F is included in the section titled “Description of Securities–Memorandum and Articles of Association” in our Registration Statement on Form F-1 initially filed with the SEC on October 29, 2010 (File No.: 333-170237), which section is incorporated herein by reference.

 

C.Material Contracts

 

During 2013 and 2014, we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to the fluctuation in value of the Renminbi against the U.S. dollar. We recorded fair value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 59,477,000 ($9,586,000) from January 1 to July 31, 2014 in connection with these agreements. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, executed an agreement (the “Novation”) with us and the financial institution that originated the foreign currency transaction agreements pursuant to which Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under the foreign currency transaction agreements. As a result, we will not be required to fund any losses related to these agreements, and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.

 

At the time that each of the foreign currency transaction agreements was established with the financial institution, we were required to deposit monies (the “Deposits”) with the financial institution that was the counterparty to the agreements. RMB 6.7 million of a total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the brother-in-law of our Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong Kung Tok as of July 9, 2014. In connection with the Novation discussed above, our Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok executed an agreement with the Company on July 31, 2014 (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by us to Wong Kung Tok were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited, and in return the Company agreed to forego any claim to RMB 15.6 million in Deposits under the foreign currency transaction agreements which were transferred to Sound Treasure Limited pursuant to the Novation.

 

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The Novation and the Offset Agreement became effective on July 31, 2014.

 

Except for the above, we did not enter into any other material contracts during fiscal years 2013 or 2014.

 

D.Exchange controls

 

Under British Virgin Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.

 

E.Taxation

 

The following summary of the material PRC and U.S. federal income tax consequences of the acquisition, ownership and disposition of China Ceramics shares, sometimes referred to as “securities,” is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in China Ceramics’ securities, such as the tax consequences under state, local and other tax laws. For purposes of this discussion, references to “China Ceramics,” “we,” “us” or “our” refer only to China Ceramics Co., Ltd.

 

PRC Taxation

 

The following discussion summarizes the material PRC income tax considerations relating to the acquisition, ownership and disposition of China Ceramics’ securities.

 

You should consult with your own tax adviser regarding the PRC tax consequences of the acquisition, ownership and disposition of China Ceramics’ securities.

 

Resident Enterprise Treatment

 

On March 16, 2007, the Fifth Session of the Tenth National People’s Congress passed the Enterprise Income Tax Law of the PRC (“EIT Law”), which became effective on January 1, 2008. Under the EIT Law, enterprises are classified as “resident enterprises” and “non-resident enterprises.” Pursuant to the EIT Law and its implementing rules, enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate on their worldwide taxable income. According to the implementing rules of the EIT Law, “de facto management body” refers to a managing body that in practice exercises overall management control over the production and business, personnel, accounting and assets of an enterprise.

 

On April 22, 2009, the State Administration of Taxation issued the Notice on the Issues Regarding Recognition of Enterprises that are Domestically Controlled as PRC Resident Enterprises Based on the De Facto Management Body Criteria, which was retroactively effective as of January 1, 2008. This notice provides that an overseas incorporated enterprise that is controlled by PRC domestic companies will be recognized as a “tax-resident enterprise” if it satisfies all of the following conditions: (i) the senior management responsible for daily production/business operations are primarily located in the PRC, and the location(s) where such senior management execute their responsibilities are primarily in the PRC; (ii) strategic financial and personnel decisions are made or approved by organizations or personnel located in the PRC; (iii) major properties, accounting ledgers, company seals and minutes of board meetings and stockholder meetings, etc., are maintained in the PRC; and (iv) 50% or more of the board members with voting rights or senior management habitually reside in the PRC.

 

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Given the short history of the EIT Law and lack of applicable legal precedent, it remains unclear how the PRC tax authorities will determine the resident enterprise status of a company organized under the laws of a foreign (non-PRC) jurisdiction, such as China Ceramics, Success Winner and Stand Best. If the PRC tax authorities determine that China Ceramics, Success Winner and/or Stand Best is a “resident enterprise” under the EIT Law, a number of tax consequences could follow. First, China Ceramics, Success Winner and/or Stand Best could be subject to the enterprise income tax at a rate of 25% on their worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, the EIT Law provides that dividend income between “qualified resident enterprises” is exempt from income tax. As a result, if China Ceramics, Success Winner and Stand Best are each treated as a “qualified resident enterprise,” all dividends paid from Hengda to China Ceramics, through Success Winner and Stand Best, should be exempt from the PRC enterprise income tax.

 

As of the date of this Annual Report, there has not been a definitive determination by China Ceramics, Success Winner, Stand Best or the PRC tax authorities as to the “resident enterprise” or “non-resident enterprise” status of China Ceramics, Success Winner and Stand Best. However, since it is not anticipated that China Ceramics, Success Winner and/or Stand Best would receive dividends or generate other income in the near future, China Ceramics, Success Winner and Stand Best are not expected to have any income that would be subject to the 25% enterprise income tax on worldwide taxable income in the near future. China Ceramics, Success Winner and Stand Best will make any necessary tax payment if China Ceramics, Success Winner or Stand Best (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that China Ceramics, Success Winner or Stand Best is a resident enterprise under the EIT Law, and if China Ceramics, Success Winner or Stand Best were to have income in the future.

 

Dividends From Hengda

 

If Stand Best is not treated as a resident enterprise under the EIT Law, then dividends that Stand Best receives from Hengda may be subject to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will normally be applicable to investors that are “non-resident enterprises” which (i) have an establishment or place of business inside the PRC, and (ii) have income in connection with their establishment or place of business that is sourced from the PRC or is earned outside the PRC but has an actual connection with their establishment or place of business inside the PRC, and (B) a PRC withholding tax at a rate of 10% will normally be applicable to dividends payable to non-resident enterprises that (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC.

 

As described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions on a case-by-case basis. China Ceramics, Success Winner and Stand Best are holding companies and substantially all of China Ceramics’, Success Winner’s and Stand Best’s income may be derived from dividends. Thus, if China Ceramics, Success Winner and/or Stand Best are considered a “non-resident enterprise” under the EIT Law and the dividends paid to China Ceramics, Success Winner and/or Stand Best are considered income sourced within the PRC, such dividends received may be subject to PRC withholding tax as described in the foregoing paragraph.

 

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The State Council of the PRC or a tax treaty between China and the jurisdiction in which the non-resident enterprise resides may reduce such income or withholding tax, with respect to a non-resident enterprise. Pursuant to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “PRC-Hong Kong Tax Treaty”), if the Hong Kong resident enterprise that is not deemed to be a conduit by the PRC tax authorities owns more than 25% of the equity interest in a PRC resident enterprise, the 10% PRC withholding tax on the dividends the Hong Kong resident enterprise receives from such PRC resident enterprise is reduced to 5%.

 

China Ceramics is a British Virgin Islands holding company, and it has a British Virgin Islands subsidiary (Success Winner), which owns a 100% equity interest in a subsidiary in Hong Kong (Stand Best), which in turns owns a 100% equity interest in Hengda, a PRC company. As a result, if Stand Best were treated as a “non-resident enterprise” under the EIT Law, then dividends that Stand Best receives from Hengda (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, if the PRC-Hong Kong Tax Treaty were applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Stand Best to be a conduit that is not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if Success Winner were treated as a PRC “non-resident enterprise” under the EIT Law and Stand Best were treated as a PRC “resident enterprise” under the EIT Law, then dividends that Success Winner receives from Stand Best (assuming such dividends were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. A similar situation may arise if China Ceramics were treated as a “non-resident enterprise” under the EIT Law, and Success Winner were treated as a “resident enterprise” under EIT Law. Any such taxes on dividends could materially reduce the amount of dividends, if any, China Ceramics could pay to its shareholders.

 

As of the date of this Annual Report, there has not been a definitive determination by China Ceramics, Success Winner, Stand Best or the PRC tax authorities as to the “resident enterprise” or “non-resident enterprise” status of China Ceramics, Success Winner and Stand Best. As described above, however, Hengda, Stand Best and Success Winner are not expected to pay any dividends in the near future. Hengda, Stand Best and Success Winner will make any necessary tax withholding if, in the future, Hengda, Stand Best or Success Winner were to pay any dividends and Hengda, Stand Best or Success Winner (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that Stand Best, Success Winner or China Ceramics is a non-resident enterprise under the EIT Law.

 

Dividends that Non-PRC Resident Investors Receive From China Ceramics; Gain on the Sale or Transfer of China Ceramics’ Securities

 

If we are determined to be a resident enterprise under the EIT Law and dividends payable to (or gains realized by) China Ceramics’ investors that are not tax residents of the PRC (“non-resident investors”) are treated as income derived from sources within the PRC, then the dividends that the non-resident investors receive from us and any such gain derived by such investors on the sale or transfer of China Ceramics’ securities may be subject to income tax under the PRC tax laws.

 

Under the PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends payable to non-resident investors that are enterprises, but not individuals, and that (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent that such dividends are deemed to be sourced within the PRC. Similarly, any gain realized on the transfer of China Ceramics’ securities by such investors also is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.

 

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The dividends paid by us to such non-resident investors with respect to China Ceramics’ securities, or gain such non-resident investors may realize from the sale or transfer of China Ceramics’ securities, may be treated as PRC-sourced income and, as a result, may be subject to PRC tax at a rate of 10%. In such event, China Ceramics may be required to withhold a 10% PRC tax on any dividends paid to such non-resident investors. In addition, such non-resident investors in China Ceramics’ securities may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of China Ceramics’ securities if such non-resident investors and the gain satisfy the requirements under the PRC tax laws. However, under the PRC tax laws, China Ceramics would not have an obligation to withhold PRC income tax in respect of the gains that such non-resident investors (including U.S. enterprise investors) may realize from the sale or transfer of China Ceramics’ securities. Also, if China Ceramics is determined to be a “resident enterprise,” its non-resident investors who are individuals may also be subject to potential PRC individual income tax at a rate of 20% with respect to dividends received from China Ceramics and/or gains derived by them from the sale or transfer of China Ceramics’ securities.

 

If China Ceramics were to pay any dividends in the future, and if China Ceramics (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that China Ceramics must withhold PRC tax on any dividends payable by China Ceramics under the PRC tax laws, China Ceramics will make any necessary tax withholding on dividends payable to its non-resident investors. If non-resident investors as described under the PRC tax laws (including U.S. investors) realize any gain from the sale or transfer of China Ceramics’ securities and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying the applicable PRC income tax on the gain from the sale or transfer of China Ceramics’ securities. As indicated above, under the PRC tax laws, China Ceramics would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of China Ceramics’ securities.

 

On December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”) that reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 addresses indirect equity transfers as well as other issues. Circular 698 is retroactively effective from January 1, 2008. According to Circular 698, where a non-resident investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the PRC tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. China Ceramics (or a non-resident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that China Ceramics (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on China Ceramics’ financial condition and results of operations (or such non-resident investor’s investment in China Ceramics).

 

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In additional, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

 

On February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-tax Resident Enterprise, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria the Circular 698 on how to assesss reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident erterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a dirct transfer of the equity intersts in the PRC tas resident enterprise and other properties in China, As a result, gains derived from such indirect transfer may be subject on PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assetsby us. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer to shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 to request the relevant transferors from whom we purchase taxable assets to comply with thiese circulars, or to establish that our company and other non-resdient entreprises in our group should not be taxed under thers circulars, which may have a material adverseeffect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable incomen of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such potential acquisitions will be increased, which may have an advers effect on our financial condition and results of operations.

 

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Penalties for Failure to Pay Applicable PRC Income Tax

 

A non-resident investor in us may be responsible for paying PRC tax on any gain realized from the sale or transfer of China Ceramics’ securities if such non-resident investor and the gain satisfy the requirements under the PRC tax laws, as described above.

 

According to the EIT Law and its implementing rules, the PRC Individual Income Tax Law and its implementing rules, the PRC Tax Administration Law (the “Tax Administration Law”) and its implementing rules, the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (the “Administration Measures”) and other applicable PRC laws or regulations (collectively the “Tax Related Laws”), where any gain derived by a non-resident investor from the sale or transfer of China Ceramics’ securities is subject to any income tax in the PRC, and such non-resident investor fails to file any tax return or pay tax in this regard pursuant to the Tax Related Laws, such investor may be subject to certain fines, penalties or punishments, including without limitation: (1) if the non-resident investor fails to file a tax return and present the relevant information in connection with tax payments, the competent tax authorities shall order it to do so within the prescribed time limit and may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000 to RMB 10,000; (2) if the non-resident investor fails to file a tax return or fails to pay all or part of the amount of tax payable, the non-resident investor shall be required to pay the unpaid tax amount payable, a surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue amount, beginning from the day the deferral begins) and a fine ranging from 50% to 500% of the unpaid amount of the tax payable; (3) if the non-resident investor fails to file a tax return and to pay the tax within the prescribed time limit according to the order by the PRC tax authorities, the PRC tax authorities may collect and check information about the income receivable by the non-resident investor in the PRC from other payers (the “Other Payers”) who will pay amounts to such non-resident investor, and send a “Notice of Tax Issues” to the Other Payers to collect and recover the tax payable and overdue fines imposed on such non-resident investor from the amounts otherwise payable to such non-resident investor by the Other Payers; (4) if the non-resident investor fails to pay the tax payable within the prescribed time limit as ordered by the PRC tax authorities, a fine may be imposed on the non-resident investor ranging from 50% to 500% of the unpaid tax payable, and the PRC tax authorities may, upon approval by the director of the tax bureau (or sub-bureau) of, or higher than, the county level, take the following compulsory measures: (i) notify in writing the non-resident investor’s bank or other financial institution to withhold from the account thereof for payment of the amount of tax payable, and (ii) detain, seal off, or sell by auction or on the market the non-resident investor’s commodities, goods or other property in a value equivalent to the amount of tax payable; or (5) if the non-resident investor fails to pay all or part of the amount of tax payable or surcharge for overdue tax payment, and cannot provide a guarantee to the PRC tax authorities, the tax authorities may notify the frontier authorities to prevent the non-resident investor or its legal representative from leaving the PRC.

 

United States Federal Income Taxation

 

General

 

The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of China Ceramics’ securities.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of China Ceramics’ securities that is for U.S. federal income tax purposes:

 

·an individual citizen or resident of the United States;

 

·a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;

 

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·an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source;

 

·a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

A beneficial owner of our securities that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of China Ceramics’ securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”

 

This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.

 

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder of China Ceramics’ securities based on such holder’s individual circumstances. In particular, this discussion considers only holders that own and hold China Ceramics’ securities as capital assets within the meaning of Section 1221 of the Code. This discussion also does not address the alternative minimum tax. In addition, this discussion does not address the U.S. federal income tax consequences to holders that are subject to special rules, including:

 

·financial institutions or financial services entities;

 

·broker-dealers;

 

·persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;

 

·tax-exempt entities;

 

·governments or agencies or instrumentalities thereof;

 

·insurance companies;

 

·regulated investment companies;

 

·real estate investment trusts;

 

·certain expatriates or former long-term residents of the United States;

 

·persons that actually or constructively own 5% or more of China Ceramics’ voting shares;

 

·persons that acquired China Ceramics’ securities pursuant to an exercise of employee share options, in connection with employee share incentive plans or otherwise as compensation;

 

·persons that hold China Ceramics’ securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;

 

·persons whose functional currency is not the U.S. dollar;

 

·controlled foreign corporations; or

 

·passive foreign investment companies.

 

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This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws, or, except as discussed herein, any tax reporting obligations of a holder of China Ceramics’ securities. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold China Ceramics’ securities through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of China Ceramics’ securities, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) in respect to the China Ceramics’ securities and any consideration received (or deemed received) by a holder in connection with the sale or other disposition of such securities will be in U.S. dollars.

 

China Ceramics has not sought, and will not seek, a ruling from the Internal Revenue Service, or “IRS,” or an opinion of counsel, as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

 

THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS’ SECURITIES. EACH HOLDER OF CHINA CERAMICS’ SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CHINA CERAMICS’ SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND APPLICABLE TAX TREATIES.

 

Tax Treatment of China Ceramics After the Redomestication and the Business Combination

 

Section 7874(b) of the Code generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% of either the voting power or the value of the stock of the acquiring corporation after the acquisition. Under regulations promulgated under Section 7874, a warrant holder of either the acquired corporation or the acquiring corporation generally is treated for this purpose as owning stock of the acquired corporation or the acquiring corporation, as the case may be, with a value equal to the excess of the value of the shares underlying the warrant over the exercise price of the warrant. If Section 7874(b) were to have applied to the Redomestication, then, among other things, China Ceramics, as the surviving entity, would have been subject to U.S. federal income tax on its worldwide taxable income following the Redomestication and the Business Combination as if it were a domestic corporation.

 

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After the completion of the Business Combination, which occurred immediately after and as part of the same integrated transaction as the Redomestication, the former stockholders of CHAC (including warrant holders treated as owning stock of CHAC pursuant to the regulations under Section 7874) should have been considered as owning, by reason of owning (or being treated as owning) stock of CHAC, less than 80% of the voting power and the value of the shares of China Ceramics (including any warrants treated as shares of China Ceramics pursuant to the regulations promulgated under Section 7874). Accordingly, Section 7874(b) should not have applied to treat China Ceramics as a domestic corporation for U.S. federal income tax purposes. However, due to the absence of full guidance on how the rules of Section 7874(b) applied to the transactions completed pursuant to the Redomestication and the Business Combination, this result is not entirely free from doubt. If, for example, the Redomestication were ultimately determined for purposes of Section 7874(b) as having occurred prior to, and separate from, the Business Combination for U.S. federal income tax purposes, the share ownership threshold for applicability of Section 7874(b) generally would have been satisfied (and China Ceramics would have been treated as a domestic corporation for U.S. federal income tax purposes) because the former stockholders of CHAC (including warrant holders treated as owning stock of CHAC), by reason of owning (or being treated as owning) stock of CHAC, would have owned all of the shares (including any warrants treated as shares) of China Ceramics immediately after the Redomestication. Although normal “step transaction” tax principles supported the view that the Redomestication and the Business Combination should have been viewed together for purposes of determining whether Section 7874(b) was applicable, because of the absence of guidance under Section 7874(b) directly on point, this result is not entirely free from doubt. The balance of this discussion assumes that China Ceramics has been and will be treated as a foreign corporation for U.S. federal income tax purposes.

 

U.S. Holders

 

Taxation of Cash Distributions Paid on Shares

 

Subject to the passive foreign investment company, or “PFIC,” rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on the shares of China Ceramics. A cash distribution on such shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of current or accumulated earnings and profits of China Ceramics (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted basis in its shares in China Ceramics. Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such shares.

 

With respect to non-corporate U.S. Holders, such dividends may be subject to U.S. federal income tax at the lower applicable regular long-term capital gains tax rate (see “—Taxation on the Disposition of Securities” below) provided that (1) the shares of China Ceramics are readily tradable on an established securities market in the United States or, in the event China Ceramics is deemed to be a Chinese “resident enterprise” under the EIT Law, China Ceramics is eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the “U.S.-PRC Tax Treaty,” (2) China Ceramics is not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under published IRS authority, shares are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Global Market. Although China Ceramics’ shares are currently listed on the NASDAQ Global Market, it cannot guarantee that its shares will continue to be listed on the NASDAQ Global Market. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any dividends paid with respect to the shares of China Ceramics.

 

If a PRC income tax applies to any cash dividends paid to a U.S. Holder on the shares of China Ceramics, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to such dividends, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

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Taxation on the Disposition of Securities

 

Upon a sale or other taxable disposition of the securities in China Ceramics, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the securities.

 

The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the securities exceeds one year. The deductibility of capital losses is subject to various limitations.

 

If a PRC income tax applies to any gain from the disposition of the securities in China Ceramics by a U.S. Holder, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

Additional Taxes

 

U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, China Ceramics’ securities, subject to certain limitations and exceptions. Under regulations, in the absence of a special election, such unearned income generally would not include income inclusions under the qualified electing fund, or QEF, rules discussed below under “ –Passive Foreign Investment Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of China Ceramics’ securities.

 

Passive Foreign Investment Company Rules

 

A foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

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Based on the composition (and estimated values) of the assets and the nature of the income of China Ceramics and its subsidiaries during its 2014 taxable year, China Ceramics does not believe that it was treated as a PFIC for such year. However, because China Ceramics has not performed a definitive analysis as to its PFIC status for its 2014 taxable year, there can be no assurance in respect to its PFIC status for such year. There also can be no assurance with respect to China Ceramics’ status as a PFIC for its current (2015) taxable year or any future taxable year.

 

If China Ceramics is determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of China Ceramics’ shares and, the U.S. Holder did not make a timely QEF election for China Ceramics’ first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) shares, a QEF election along with a purging election or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:

 

·any gain recognized by the U.S. Holder on the sale or other disposition of its shares; and

 

·any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the shares of China Ceramics during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the shares).

 

Under these rules:

 

·the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares;

 

·the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of the first taxable year of China Ceramics in which China Ceramics qualified as a PFIC will be taxed as ordinary income;

 

·the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and

 

·the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.

 

In general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to its shares in China Ceramics by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder generally will be required to include in income its pro rata share of China Ceramics’ net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which China Ceramics’ taxable year ends if China Ceramics is treated as a PFIC for that taxable year. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.

 

The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS.

 

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In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from China Ceramics. Upon request from a U.S. Holder, China Ceramics will endeavor to provide to the U.S. Holder, no later than 90 days after the request, such information as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that China Ceramics will have timely knowledge of its status as a PFIC in the future or of the required information to be provided.

 

If a U.S. Holder has made a QEF election with respect to its shares in China Ceramics, and the special tax and interest charge rules do not apply to such shares (because of a timely QEF election for China Ceramics’ first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares or a QEF election, along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale or other taxable disposition of such shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares in a QEF.

 

Although a determination as to China Ceramics’ PFIC status will be made annually, an initial determination that it is a PFIC generally will apply for subsequent years to a U.S. Holder who held shares of China Ceramics while it was a PFIC, whether or not it met the test for PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for China Ceramics’ first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) shares in China Ceramics, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such shares for any taxable year of China Ceramics that ends within or with a taxable year of the U.S. Holder and in which China Ceramics is not a PFIC. On the other hand, if the QEF election is not effective for each of the taxable years of China Ceramics in which China Ceramics is a PFIC and during which the U.S. Holder holds (or is deemed to hold) shares in China Ceramics, the PFIC rules discussed above will continue to apply to such shares unless the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging election to recognize under the rules of Section 1291 of the Code any gain that the U.S. Holder would otherwise recognize if the U.S. Holder had sold its shares for their fair market value on the “qualification” date. The qualification date is the first day of China Ceramics’ tax year in which it qualifies as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder held shares on the qualification date. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will increase the adjusted tax basis in its shares by the amount of the gain recognized and will also have a new holding period in the shares for purposes of the PFIC rules.

 

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Alternatively, if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) shares in China Ceramics and for which China Ceramics is determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its shares as long as such shares continue to be treated as marketable stock. Instead, in general, the U.S. Holder will include as ordinary income for each year that China Ceramics is treated as a PFIC, the excess, if any, of the fair market value of its shares at the end of its taxable year over the adjusted tax basis in its shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its shares over the fair market value of its shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the shares in a taxable year in which China Ceramics is treated as a PFIC generally will be treated as ordinary income. Special tax rules may apply if a U.S. Holder makes a mark-to-market election for a taxable year after the U.S. Holder holds (or is deemed to hold) the shares and for which China Ceramics is determined to be a PFIC.

 

The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, including the NASDAQ Global Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Although China Ceramics’ shares are currently listed on the NASDAQ Global Market, it cannot guarantee that its shares will continue to be listed or will be traded on the NASDAQ Global Market. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to the shares of China Ceramics under their particular circumstances.

 

If China Ceramics is a PFIC and, at any time, has a foreign subsidiary that is classified as a PFIC, a U.S. Holder of China Ceramics’ shares generally should be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if China Ceramics receives a distribution from, or disposes of all or part of its interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. Upon request, China Ceramics will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election with respect to the lower- tier PFIC. However, there is no assurance that China Ceramics will have timely knowledge of the status of any such lower-tier PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would not be available with respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.

 

A U.S. Holder that owns (or is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.

 

The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of shares in China Ceramics should consult their own tax advisors concerning the application of the PFIC rules to such shares under their particular circumstances.

 

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Non-U.S. Holders

 

Cash dividends paid or deemed paid to a Non-U.S. Holder in respect to its securities in China Ceramics generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).

 

In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of securities in China Ceramics unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).

 

Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.

 

Backup Withholding and Information Reporting

 

In general, information reporting for U.S. federal income tax purposes should apply to distributions made on the securities of China Ceramics within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of securities of China Ceramics by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its securities and adjustments to that tax basis and whether any gain or loss with respect to such securities is long-term or short-term also may be required to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our securities.

 

Moreover, backup withholding of U.S. federal income tax at a rate of 28% generally will apply to dividends paid on the securities of China Ceramics to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of securities of China Ceramics by a U.S. Holder (other than an exempt recipient), in each case who (a) fails to provide an accurate taxpayer identification number; (b) is notified by the IRS that backup withholding is required; or (c) in certain circumstances, fails to comply with applicable certification requirements.

 

A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.

 

Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.

 

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F.Dividends and paying agents

 

Not required.

 

G.Statement by experts

 

Not required.

 

H.Documents on display

 

Documents concerning us that are referred to in this document may be inspected at Junbing Industrial Zone, Anhai, Jinjiang City, Fujian Province, PRC.

 

In addition, we file annual reports and other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider short-swing disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of the documents upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains reports and other information regarding registrants (including us) that file electronically with the Commission which can be assessed at http://www.sec.gov.

 

I.Subsidiary Information

 

Not required.

 

ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to our outstanding debts and interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. As of December 31, 2014, our total outstanding loans for the continuing operations amounted to RMB 84.7 million ($13.7 million) with interest rates in the range of 2.48% to 8.16% per annum. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in market interest rates.

 

Foreign Currency Risk

 

During 2013 and 2014, we entered into certain foreign currency transaction agreements with an unaffiliated financial institution related to the fluctuation in value of the Renminbi against the U.S. dollar, for investment and not hedging purposes. The Company recorded fair value gains on these agreements totaling RMB 3,346,000 for the year ended December 31, 2013. However, in 2014, as the Renminbi depreciated against the U.S. dollar, we incurred realized and unrealized losses totaling RMB 54,977,000 ($9,586,000) for the year ended December 31, 2014 in connection with these agreements. We do not intend to enter into similar investment transactions in the future.

 

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In June 2014, we, our Chief Executive Officer and the Audit Committee set out to attempt to terminate the foreign currency transaction agreements; and to reach a resolution that would preclude the depletion of our liquid assets by virtue of its having entered into the foreign currency transaction agreements. Ultimately our Chief Executive Officer agreed to cause an entity controlled by him to assume those agreements. On July 31, 2014, Sound Treasure Limited, our largest shareholder and an affiliate of our Chief Executive Officer, executed an agreement (the “Novation”) with us and the financial institution that originated the foreign currency transaction agreements pursuant to which Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under the foreign currency transaction agreements. As a result, we will not be required to fund any losses related to these agreements, and will neither suffer any future liabilities arising under those agreements nor enjoy any benefits arising under those agreements.

 

At the time that each of the foreign currency transaction agreements was established with the financial institution, we were required to deposit monies (the “Deposits”) with the financial institution that was the counterparty to the agreements. RMB 6.7 million of a total of RMB 15.6 million in deposits that we made were funded on our behalf by Wong Kung Tok (who is the brother-in-law of our Chief Executive Officer), and were included in a total of RMB 40.2 million in loans owing by us to Wong Kung Tok as of July 9, 2014. In connection with the Novation discussed above, our Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok executed an agreement with the Company on July 31, 2014 (the “Offset Agreement”) pursuant to which loans totaling RMB 20.7 million owed by us to Wong Kung Tok were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited, and in return the Company agreed to forego any claim to RMB 15.6 million in Deposits under the foreign currency transaction agreements which will be transferred to Sound Treasure Limited pursuant to the Novation.

 

The Novation and the Offset Agreement became effective on July 31, 2014. As a result of these transactions, Sound Treasure Limited released us from liabilities aggregating RMB 76.8 million and we transferred ownership of RMB 15.6 million in deposits held at the financial institution from us to Sound Treasure Limited. As a result of the Novation and the Offset Agreement, approximately RMB 76.8 million in liabilities on our books were extinguished in 2014 and the Capital Reserve account was increased by approximately RMB 61.3 million.

 

Except as disclosed above, we do not currently have any significant foreign exchange exposure as our sales and purchases are predominantly denominated in RMB. As of December 31, 2014, nearly all of our monetary assets and monetary liabilities were denominated in RMB except for certain bank balances, bank borrowings and other payables which were denominated in US dollars. However, in the future, a proportion of our sales may be denominated in other currencies as we expand into overseas markets. In such circumstances, we anticipate our primary market risk, if any, to be related to fluctuations in exchange rates. Exchange rate risk may arise if we are required to use different currencies for various aspects of its operations.

 

The Renminbi’s exchange rate with the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. The exchange rate for conversion of Renminbi into foreign currencies is heavily influenced by intervention in the foreign exchange market by the People’s Bank of China. From 1995 until July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately 8.3 Renminbi per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S. dollar. However, the Renminbi is restricted to a rise or fall of no more than 0.5% per day versus the U.S. dollar, and the People’s Bank of China continues to intervene in the foreign exchange market to prevent significant short-term fluctuations in the Renminbi exchange rate. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to 2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant floatation in the RMB’s value against the U.S. dollar. The international reaction to the RMB revaluation has generally been positive. But, international pressure continues to be placed on the Chinese government to adopt an even more flexible currency policy, which could result in significant fluctuation of the RMB against the U.S. dollar.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. While we have no present intention to enter into currency hedging transactions in the future. we may decide to enter into hedging transactions if we are exposed to foreign currency risk. The availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

 

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ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not required.

 

PART II

 

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

There has been no default of any indebtedness nor is there any arrearage in the payment of dividends.

 

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

On November 20, 2009, pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009, CHAC merged with and into China Ceramics, resulting in the Redomestication of CHAC to the British Virgin Islands as China Ceramics. At the time of the merger, each outstanding ordinary share of CHAC converted automatically into one share of China Ceramics, and each right to purchase ordinary shares in CHAC automatically converted into an equivalent right to purchase shares in China Ceramics. Accordingly, the shares and warrants became governed by China Ceramics’ Amended and Restated Memorandum and Articles of Association. The rights and duties attaching to each share remained substantially equivalent. Immediately following the merger and Redomestication, and as part of the same integrated transaction, China Ceramics acquired all of the outstanding securities of Success Winner.

 

There are no restrictions on working capital and no removal or substitution of assets securing any class of our registered securities.

 

ITEM 15.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of December 31, 2014. Based on such evaluation, our management has concluded that our disclosure controls and procedures as of December 31, 2014 were not effective. The conclusion was reached primarily due to the material weakness in our internal control over financial reporting described below.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

 

Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures as of December 31, 2014 were not effective for the reasons set forth below.

 

Notwithstanding the material weakness described below, management has concluded that the consolidated financial statements included in this form 20-F present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods in conformity with IFRS.

 

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Management’s annual report on internal control over financial reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting purposes in accordance with IFRS. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies and procedures may deteriorate.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the updated framework in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 and updated in May 2013. Management has concluded that our internal control over financial reporting was not effective as of December 31, 2014.

 

The specific material weakness we identified in our internal control over financial reporting related to the lack of sufficient qualified accounting personnel with appropriate understanding of IFRS and SEC reporting requirements commensurate with our financial reporting requirements.

 

We have taken, and are taking, certain actions to remediate the material weakness to our lack of IFRS and SEC reporting experience. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge and experience of IFRS, SEC reporting and other relevant securities laws. In addition, we plan to provide additional training to our accounting personnel on IFRS, SEC reporting and other regulatory requirements regarding the preparation of financial statements.

 

We are still in the process of strengthening our controls and procedures in order to eliminate inadvertent errors, deficiencies and deviations that can appear in the normal course of business and achieve full compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We believe that the measures described above will remediate the material weakness identified above. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine that additional measures are necessary to address any future control deficiencies.

 

110
 

 

Attestation report of the registered public accounting firm

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission.

 

Changes in Internal Controls over Financial Reporting

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2013, management identified that in our internal control over financial reporting there was a lack of sufficient qualified accounting personnel with appropriate understanding of IFRS and SEC reporting requirements commensurate with our financial reporting requirements, and concluded that to meet the requirements of being a U.S. public company, we need to enhance our supervision, monitoring and review of the financial statements preparation processes. We did the following in an attempt to remediate the material weaknesses:

 

1.We adopted additional internal review procedures with respect to required disclosures in the reports that we file with, or submit to, the SEC under the Exchange Act.

 

2.On July 24, 2014, we contracted with a US internal control consulting firm to act as our consultant to conduct a separate and independent review of our financial reporting.

 

3.Our finance and accounting staff members have attended seminars organized by professional accountancy bodies.

 

Notwithstanding the foregoing changes, our management determined that the material weakness still existed as of December 31, 2014.

 

Other than as set forth above, there have not been any changes in internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

ITEM 16.RESERVED

 

ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT.

 

Our Board of Directors has determined that Mr. Jianwei Liu is an audit committee financial expert as that term is defined in Item 16A(b) of Form 20-F, and “independent” as that term is defined in the NASDAQ listing standards.

 

ITEM 16B.CODE OF ETHICS.

 

We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. A copy of the Code of Business Conduct and Ethics is available on our website, http://www.cceramics.com /Corporate-Governance.html.

 

111
 

 

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The following table represents the approximate aggregate fees for services rendered by Grant Thornton Shanghai, PRC and Crowe Horwath (HK) CPA Limited for the periods indicated:

 

   December 31,
2013		   December 31,
2014		 
   RMB’000   RMB’000 
Audit Fees - Grant Thornton Shanghai, PRC   3,245    1,452 
Audit Fees - Crowe Horwath (HK) CPA Limited   -    4,540 
Audit Related Fees   -    - 
Tax Fees   -    - 
Total Fees   3,245    5,992 

 

Audit Fees

 

“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our auditors for the audits of our annual financial statements and assistance with and review of documents filed with the SEC, and fees for services that are normally incurred in connection with statutory and regulatory filings or engagements, such as comfort letters, consents, and review of documents filed with the SEC.

 

Audit Related Fees

 

There were no audit-related fees.

 

Tax Fees

 

There were no tax fees.

 

Pre-Approval of Services

 

Our audit committee evaluated and approved in advance the scope and cost of the engagement of an auditor before the auditor rendered its audit and non-audit services.

 

ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

 

None.

 

ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

 

No purchase of our securities were made by us or our affiliates in 2014

 

ITEM 16F.CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.

 

On May 1, 2014, we announced that the Audit Committee of the Board had terminated the engagement of Grant Thornton (Shanghai, PRC), our principal independent registered public accountants (“GT”), and approved the engagement of Crowe Horwath (HK) CPA Limited (“Crowe HK”), as our principal independent registered public accountant to audit our financial statements for each of the years in the three years period ended December 31, 2013. During fiscal years 2012 and 2013, and any subsequent interim period prior to engaging Crowe HK, neither we nor anyone on our behalf consulted Crowe HK regarding the application of accounting principles, the type of audit opinion that might be rendered on our financial statements, or any matter that was either the subject of a disagreement or a reportable event (each as defined in Item 16F (a)(1)(iv) of Form 20-F).

 

112
 

 

On June 4, 2014, GT informed us that reliance should no longer be placed on its audit opinions for the years ended December 31, 2010 through 2012.

 

During the course of its audit of our 2013 financial statements, GT raised certain questions with our management. GT raised questions regarding (i) a discrepancy related to a bank confirmation from one bank, (ii) a difference between the taxation information posted on a local PRC government website and our own records, (iii) what GT perceived to be certain hand writing similarities on envelopes relating to a few confirmations received from our distributors, and (iv) one of our distributors that had an outstanding balance owed to us at year end had ceased operations. We provided explanations in response to each of the questions, and the Audit Committee discussed these questions with GT, but the questions were not resolved to GT’s satisfaction at the time we terminated GT based on what we felt was an absence of effective communication.

 

With respect to the specific items raised by GT, we believe each item has been addressed as follows:

 

(i)Bank Confirmation Received from Pingan Bank. GT informed us that it received a bank confirmation from Pingan Bank, and that the bank’s teller at Pingan Bank made a notation on the confirmation stating that we also had a RMB30 million bank acceptance note issued by us (similar to a post-dated check) outstanding as of December 31, 2013. We responded to GT that this was a clerical error committed by the bank. In turn, GT asked us to request that the bank provide an explanation for the erroneous confirmation and that the bank send that explanation directly to GT. We made a written request that the bank provide an explanation directly to GT, and understand that approximately one week later, GT received a letter from the bank explaining that the previous confirmation was a mistake and that there was no outstanding bank acceptance note. GT has never provided a copy of that correspondence to us, but we understand that the correspondence was duly “chopped” and that it was issued by a different department at the bank. GT questioned the validity of the bank’s correction of its initial confirmation, and informed us that a bank teller at Pingan Bank told a GT representative that she would have been the person at the bank responsible for issuing any such follow-on correspondence and that she did not generate the correspondence that explained that the initial confirmation contained an erroneous reference to an outstanding bank acceptance note.

 

(ii)Taxation Information from Local Government Website. GT notified us that it had noticed a posting on a local district government website that indicated that we are one of the top taxpayers in that district and that we had paid RMB10-20 million in taxes (income tax and VAT) for 2012. However, GT raised the concern that our records and financial statements reflect that we paid in excess of RMB100 million in taxes in 2012. We cautioned GT that the local government’s calculation is different from the tax bureau’s calculation, and also shared our belief that the local government website might only reflect the tax paid to the domestic tax bureau and not the tax paid to the national tax bureau. We thereafter sought and received a certification from the tax bureau that all taxes due and owing by us for the subject periods have been paid.

 

(iii)Similar Hand Writing on Three Accounts Receivable Confirmation Envelopes. GT informed us that it noticed that there were accounts receivable confirmations sent to GT from three customers that appeared to have “very similar hand writing” on their envelopes. According to GT, the three confirmations are from three different companies in three different locations in China. When so informed by GT, we checked with our distributors and customers and confirmed that each sent out its own confirmation to GT. We offered to assist GT in obtaining additional comfort regarding the status of the amounts confirmed. We are aware that certain of our employees did assist their customers with the process to assure that the confirmations were received by GT in a timely fashion. That assistance involved the preparation of the return envelopes in which certain customer confirmations were deposited and transmitted. Said employees did not complete the confirmations, and there has been no indication that the confirmations were anything but accurate.

 

113
 

 

(iv)Customer Closed Its Business. GT informed us that it noticed in March 2014 that one of our distributors is listed as “de-registered” on the government website. That particular distributor purchased RMB23 million in product from us in 2013 and had a RMB13 million accounts receivable balance at the end of the year. We notified GT that the distributor informed us of its intent to close its business and paid its outstanding balance with us before the distributor closed.

 

In addition to the foregoing explanations provided by our management, the Audit Committee discussed with GT implementing additional special procedures or conducting an internal investigation in order to address GT’s concerns. GT rejected these suggestions and, instead, insisted that we conduct an independent investigation of the concerns outline above, which, in turn, would have rendered the timely completion of the 2013 audit and timely filing of the 2013 Annual Report all but impossible. The Audit Committee and the Company also believe that GT’s request for an independent investigation was premature and disproportionate given the nature of the concerns raised. In addition, a majority of the Audit Committee believed that communications between GT and our management and the Audit Committee had become significantly impaired. In light of the foregoing, the Audit Committee and the Board voted to dismiss GT and to engage Crowe HK to implement additional procedures in the audit of the Company’s financial statements for the fiscal year ended December 31, 2013 and to re-audit of the prior fiscal years ended December 31, 2012 and 2011 to address the questions raised by GT.

 

The Company previously provided GT with a copy of the foregoing disclosures and requested that GT review such disclosures and provide a letter addressed to the SEC as specified by Item 16.F of Form 20-F. GT’s letter was filed with the Company’s Form 20-F for fiscal year 2013.

 

We also requested our new independent registered public accountants, Crowe HK, to review the foregoing disclosures regarding them. We offered Crowe HK the opportunity to furnish us with a letter addressed to the SEC containing any new information, clarification of our expression of our views or the respects in which it does not agree with our statements in response to Item 16F of Form 20-F.

 

Crowe HK informed us that it had no disagreement with the disclosure regarding them. Consequently, it declined the opportunity to furnish us with such a letter.

 

ITEM 16G.CORPORATE GOVERNANCE

 

Pursuant to the home country rule exemption set forth under Nasdaq Listing Rule 5615(a)(3), we are not required to hold an annual meeting because neither our Memorandum and Articles of Association nor the law of the British Virgin Islands require us to hold an annual meeting of shareholders.

 

ITEM 16H.MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART III

 

ITEM 17.FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

ITEM 18.FINANCIAL STATEMENTS

 

The financial statements are filed as part of this annual report beginning on page F-1.

 

114
 

 

ITEM 19.EXHIBITS

 

Exhibit No.   Description
1.1   Amended and Restated Memorandum and Articles of Association of China Ceramics Co., Ltd.(1)
1.2   Memorandum and Articles of Association of Success Winner Limited(2)
1.3   Memorandum and Articles of Association of Stand Best Creation Limited(2)
1.4   Operation Charter of Jinjiang Hengda Ceramics Co., Ltd.(2)
2.1   Specimen Unit Certificate(3)
2.2   Specimen Common Stock Certificate(3)
3.1   Form of Voting Agreement(2)
4.1   Merger and Stock Purchase Agreement among CHAC, China Ceramics Co., Ltd., Hengda, Success Winner and the Seller(2)
4.2   Form of Registration Rights Agreement among CHAC and the founders(3)
4.3   Form of Earn-Out Escrow Agreement(2)
4.4   Form of Indemnity Escrow Agreement(2)
4.6   Form of Lock-Up Agreement for CHAC founders(2)
4.7   Form of Lock-Up Agreement(2)
4.8   Acquisition Agreement, dated November 19, 2009, by and between Jinjiang Hengda Ceramics Co., Ltd., all of the shareholders of Jiangxi Hengdali Constructional Ceramics Co., Ltd., and Jiangxi Hengdali Constructional Ceramics Co., Ltd(8)
4.9   Administrative Services Agreement by and between China Ceramics Co., Ltd. and Stuart Management Co., dated December 1, 2009(8)
4.10   License Agreement between Huang Jia Dong and Jinjiang Hengda Ceramics Co., Ltd.(6)
4.11   China Ceramics Co., Ltd. 2010 Incentive Compensation Plan(7)
4.12   Employment Agreement, dated as of February 1, 2013, by and between China Ceramics and Huang Jia Dong(9)
4.13   Employment Agreement, dated as of February 1, 2013, by and between China Ceramics and Su Pei Zhi(9)
4.14   Employment Agreement, dated as of February 1, 2013, by and between China Ceramics and Su Wei Feng(9)
4.15   Employment Agreement, dated as of August 1, 2012, by and between China Ceramics and Hen Man Edmund(9)
4.16   Term sheets relating to agreemens for derivative instruments(10)
4.17   Agreement between Taishin International Bank, Co., Ltd., Stand Best Creation Limited and Sound Treasure Limited, dated July 31, 2014(10)
4.18   Agreement between Stand Best Creation Limited, Huang Jia Dong, Wong Kung Tok, Mr. Huang’s brother-in-law, and Sound Treasure Limited, dated July 31, 2014(10)
8.1   List of Subsidiaries(5)
11.1   Code of Business Conduct and Ethics(8)
12.1   Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended
12.2   Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended
13.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
99.1   Press Release dated April 14, 2015

 

(1)Incorporated by reference to Annexes C and D of China Ceramics’ Prospectus on Form 424B3 filed with the SEC on November 13, 2009.

 

(2)Incorporated by reference to China Ceramics’ Registration Statement on Form F-4 (File No. 333-161557).

 

115
 

 

(3)Incorporated by reference to exhibits of the same number filed with CHAC’s Registration Statement on Form F-1 or amendments thereto (File No. 333-145085).

 

(4)Incorporated by reference to CHAC’s Form 8-K, dated November 21, 2007.

 

(5)Incorporated by reference to exhibits of the same number filed with China Ceramics’ Registration Statement on Form F-1 (File No. 333-164784).

 

(6)Incorporated by reference to exhibits of the same number filed with China Ceramics’ Registration Statement on Form F-1 (File No. 333-170237).

 

(7)Incorporated by reference to Annex A to Exhibit 99.1 filed with China Ceramics’ Report of Foreign Private Issuer on Form 6-K filed with the SEC on November 20, 2010

 

(8)Incorporated by reference to China Ceramics’ Annual Report on Form 20-F filed with the SEC on May 17, 2010.

 

(9)Incorporated by reference to China Ceramics’ Annual Report on Form 20-F filed with the SEC on April 24, 2013.

 

(10)Incorporated by reference to China Ceramics’ Annual Report on Form 20-F filed with the SEC on July 31, 2014.

 

116
 

 

SIGNATURES

 

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  CHINA CERAMICS CO., LTD.
     
April 20, 2015 By: /s/ Huang Jia Dong
    Name: Huang Jia Dong
    Title: Chief Executive Officer (Principal Executive Officer)
       
  CHINA CERAMICS CO., LTD.
     
April 20, 2015 By: /s/ Hen Man Edmund
    Name: Hen Man Edmund
    Title: Chief Financial Officer (Principal Financial Officer)

 

117
 
 

 

China Ceramics Co., Ltd. and Its Subsidiaries

 

Index to Consolidated Financial Statements

 

  Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Profit or Loss and Other Comprehensive Income for the years ended December 31, 2014, 2013 and 2012 F-3
Consolidated Statements of Financial Position as of December 31, 2014, 2013 and 2012 F-4
Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013 and 2012 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 F-6
Notes to Consolidated Financial Statements F-7~F-42

 

 
 

 

China Ceramics Co., Ltd. and Its Subsidiaries

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of China Ceramics Co., Ltd.

 

We have audited the accompanying consolidated statements of financial position of China Ceramics Co., Ltd. and its subsidiaries (the “Company”) as of December 31, 2014, 2013 and 2012, and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit, of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2014, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

/s/ Crowe Horwath (HK) CPA Limited

 

Hong Kong, China

 

April 20, 2015

 

F-2
 

 

China Ceramics Co., Ltd. and Its Subsidiaries

Consolidated Statements of Profit or Loss and Other Comprehensive Income

For the Years Ended December 31, 2014, 2013 and 2012

 

      For the years ended December 31, 
   Notes  2014
RMB'000		   2013
RMB'000		   2012
RMB'000		 
Revenue  5   1,037,651    932,894    1,444,891 
                   
Cost of sales      (933,220)   (878,818)   (1,063,892)
                   
Gross profit      104,431    54,076    380,999 
                   
Other income  5   429    656    378 
Selling and distribution expenses      (14,251)   (9,814)   (11,378)
Administrative expenses      (29,529)   (27,565)   (29,974)
Finance costs  6   (4,556)   (4,201)   (9,319)
Realized and unrealized fair value (loss)/gain on derivative financial instruments  7   (59,477)   3,346    - 
Other expenses      (10,937)   (20,195)   (1,943)
                   
(Loss)/profit before taxation  8   (13,890)   (3,697)   328,763 
Income tax (expense)/credit  9   (16,463)   1,665    (84,932)
                   
(Loss)/profit attributable to shareholders      (30,353)   (2,032)   243,831 
                   
Other comprehensive income for the year, net of tax:                  
Items that may be reclassified subsequently to profit or loss:                  
Exchange differences on translation of financial statements of foreign operations      1    (41)   (31)
                   
Total comprehensive (loss)/income for the year      (30,352)   (2,073)   243,800 
                   
(Loss)/earnings per share                  
Basic (RMB)  10   (1.49)   (0.10)   11.93 
Diluted (RMB)  10   (1.49)   (0.10)   11.93 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

China Ceramics Co., Ltd. and Its Subsidiaries

Consolidated Statements of Financial Position

 

      As of December 31, 
   Notes  2014
RMB’000		   2013
RMB’000		   2012
RMB’000		 
ASSETS AND LIABILITIES                  
Non-current assets                  
Property, plant and equipment  12   718,418    802,578    795,983 
Land use rights  13   29,259    29,929    30,598 
Goodwill  11 and 26   3,735    3,735    3,735 
Deferred tax assets  9   7,854    9,797    1,059 
Long-term prepaid expenses  14   1,404    -    - 
                   
       760,670    846,039    831,375 
                   
Current assets                  
Inventories  15   330,763    307,436    290,603 
Trade receivables  16   549,925    490,989    455,885 
Other receivables and prepayments  17   2,178    15,525    4,092 
Derivative financial instruments  29   -    44    - 
Restricted cash  18   28,872    37,359    - 
Cash and bank balances  18   61,155    28,848    89,448 
                   
       972,893    880,201    840,028 
                   
Current liabilities                  
Trade payables  19   122,168    152,572    115,123 
Accrued liabilities and other payables  20   49,989    43,140    46,373 
Interest-bearing bank borrowings  21   84,704    99,652    10,000 
Amounts owed to related parties  27   24,902    8,539    4,796 
Income tax payable      2,772    1,520    869 
                   
       284,535    305,423    177,161 
                   
Net current assets      688,358    574,778    662,867 
                   
Non-current liabilities                  
Interest-bearing bank borrowings  21   -    -    50,000 
Deferred tax liabilities  9   1,404    1,245    1,052 
                   
       1,404    1,245    51,052 
                   
Net assets      1,447,624    1,419,572    1,443,190 
                   
EQUITY                  
Share capital  22   137    137    137 
Reserves  23   1,447,487    1,419,435    1,443,053 
Total shareholder’s equity      1,447,624    1,419,572    1,443,190 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

  

China Ceramics Co., Ltd. and Its Subsidiaries

Consolidated Statements of Changes in Equity

For the Years Ended December 31, 2014, 2013 and 2012

 

   Outstanding       Reverse       Share-based               Currency     
   share   Share   recapitalization   Merger   payment   Statutory   Capital   Retained   translation   Total 
   capital   premium   reserve   reserve   reserve   reserve   reserve   earnings   reserve   Equity 
   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000 
   (Note 22)       (Note23(e))   (Note 23(c))   (Note23(d))   (Note23(a))   (Note 23(f))       (Note23(b))     
Balance at January 1, 2012   124    659,520    (507,235)   58,989    115,595    94,608    -    772,637    (499)   1,193,739 
Net profit for the year   -    -    -    -    -    -    -    243,831    -    243,831 
Exchange differences on translation of financial statements of foreign operations   -    -    -    -    -    -    -    -    (31)   (31)
Total comprehensive income for the year   -    -    -    -    -    -    -    243,831    (31)   243,800 
Issuance of new shares   13    (13)   -    -    -    -    -    -    -    - 
Transfer to statutory reserve                  -    -    25,347    -    (25,347)   -    - 
Employee share-based payment options   -    -    -    -    5,651    -    -    -    -    5,651 
Balance at December 31, 2012   137    659,507    (507,235)   58,989    121,246    119,955    -    991,121    (530)   1,443,190 
Net loss for the year   -    -    -    -    -    -    -    (2,032)   -    (2,032)
Exchange differences on translation of financial statements of foreign operations   -    -    -    -    -    -    -    -    (41)   (41)
Total comprehensive loss for the year   -    -    -    -    -    -    -    (2,032)   (41)   (2,073)
Transfer to statutory reserve   -    -    -    -    -    3,057    -    (3,057)   -    - 
Employee share-based payment options   -    -    -    -    2,117    -    -    -    -    2,117 
Dividends declared and paid (Note 24)   -    -    -    -    -    -    -    (23,662)   -    (23,662)
Balance at December 31, 2013   137    659,507    (507,235)   58,989    123,363    123,012    -    962,370    (571)   1,419,572 
Net loss for the year   -    -    -    -    -    -    -    (30,353)   -    (30,353)
Exchange differences on translation of financial statements of foreign operations   -    -    -    -    -    -    -    -    1    1 
Total comprehensive loss for the year   -    -    -    -    -    -    -    (30,353)   1    (30,352)
Transfer to statutory reserve   -    -    -    -    -    4,893    -    (4,893)   -    - 
Employee share-based payment options   -    -    -    -    150    -    -    -    -    150 
Dividends declared and paid (Note 24)   -    -    -    -    -    -    -    (3,012)   -    (3,012)
Contribution from a related party (Note 23(f))   -    -    -    -    -    -    61,266    -    -    61,266 
Balance at December 31, 2014   137    659,507    (507,235)   58,989    123,513    127,905    61,266    924,112    (570)   1,447,624 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

China Ceramics Co., Ltd. and Its Subsidiaries
Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014, 2013 and 2012

 

      For the years ended December 31, 
   Notes  2014
RMB’000		   2013
RMB’000		   2012
RMB’000		 
Cash flows from operating activities                  
(Loss)/profit before taxation      (13,890)   (3,697)   328,763 
Adjustments for                  
Amortization of land use rights  13   670    669    669 
Depreciation of property, plant and equipment  12   69,450    69,553    66,186 
Loss on disposal of property, plant and equipment  12   3,537    18,926    512 
Realized and unrealized loss/(gain) from derivative financial instruments  7   59,477    (3,346)   - 
Write down of inventories  15   2,438    23,414    4,237 
Share-based compensation  25   150    2,117    5,651 
Finance costs  6   4,556    4,201    9,319 
Interest income  5   (429)   (467)   (380)
Foreign exchange loss      591    -    - 
Operating cash flows before working capital changes      126,550    111,370    414,957 
Increase in inventories      (25,765)   (40,247)   (3,059)
(Increase)/decrease in trade receivables      (58,937)   (35,104)   17,324 
Decrease in other receivables and prepayments      112    398    22,285 
(Decrease)/increase in trade payables      (30,404)   37,449    (137,559)
Increase/(decrease) in accrued liabilities, other payables and amounts owed to related parties      28,845    (11,114)   6,870 
Cash generated from operations      40,401    62,752    320,818 
Interest paid      (4,576)   (4,408)   (9,370)
PRC income tax paid      (13,108)   (6,229)   (120,247)
Net cash generated from operating activities      22,717    52,115    191,201 
                   
Cash flows from investing activities                  
Proceed from derivative financial instruments      1,390    3,302    - 
Proceed from disposal of property, plant and equipment      11,172    1,994    269 
Acquisition of property, plant and equipment  12   -    (97,068)   (19,520)
Increase in restricted cash      -    (37,359)   - 
Interest received      429    467    380 
Net cash generated from/(used in) investing activities      12,991    (128,664)   (18,871)
                   
Cash flows from financing activities                  
New bank borrowings      57,119    49,652    - 
Repayment of short-term loans      (73,064)   (10,000)   (125,000)
Dividend paid      (1,505)   (11,831)   - 
Deposit to stock transfer agent for dividend payment      -    (11,831)   - 
Advances from related party      14,048    -    - 
Net cash (used in)/generated from financing activities      (3,402)   15,990    (125,000)
                   
Net increase/(decrease) in cash and cash equivalents      32,306    (60,559)   47,330 
Cash and cash equivalents, beginning of year      28,848    89,448    42,149 
Effect of foreign exchange rate differences      1    (41)   (31)
Cash and cash equivalents, end of year      61,155    28,848    89,448 
Non-cash transactions:                  
Payments of dividends funded by deposit to stock transfer agent  17   11,831    -    - 
Restricted cash funded by a related party  23(f)   6,659    -    - 
Loss on derivative financial instruments funded by a related party  23(f)   4,727    -    - 
Transfer of restricted cash to a related party  23(f)   15,552    -    - 
Release of liabilities under the Novation Agreement  23(f)   56,095    -    - 
Release of liabilities under the Offset Agreement  23(f)   20,723    -    - 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

1.GENERAL INFORMATION

 

China Ceramics Co., Ltd. (“China Ceramics” or the “Company”) is a British Virgin Islands company operating under the BVI Business Companies Act (2004) with its shares listed on the NASDAQ (“symbol: CCCL”). Its predecessor company, China Holdings Acquisition Corp. (“CHAC”), was incorporated in Delaware on June 22, 2007, and was organized as a blank check company for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business, that has its principal operations in Asia. The Company has no operations and has no assets or liabilities of consequence outside its investments in its operating subsidiaries. The head office of the Company is located at Junbing Industrial Zone, Jinjiang City, Fujian Province, the People’s Republic of China (“PRC”).

 

On November 20, 2009, CHAC merged with and into China Ceramics, its wholly owned British Virgin Islands subsidiary, with China Ceramics surviving the merger (the “Redomestication”). On the same day, pursuant to the terms of a merger and stock purchase agreement dated August 19, 2009 (the “acquisition agreement”), China Ceramics acquired all of the outstanding securities of Success Winner Limited (“Success Winner”) held by Mr. Wong Kung Tok in exchange for US$10.00 and 5,743,320 shares of China Ceramics (the “Success Winner Acquisition”). The total number of issued and outstanding shares of China Ceramics immediately after the acquisition was 8,950,171.

 

Prior to the Success Winner Acquisition on November 20, 2009, neither CHAC nor China Ceramics had an operating business.

 

Jinjiang Hengda Ceramics Co., Ltd. (“Hengda”), which became the operating entity of China Ceramics in connection with the Success Winner Acquisition, was established on September 30, 1993 under the laws of PRC with 15% of its equity interest owned by Fujian Province Jinjiang City Anhai Junbing Hengda Construction Material Factory (“Anhai Hengda”) and 85% owned by Chi Wah Trading Import and Export Company (“Chi Wah”). Chi Wah is a sole proprietor under the laws of Hong Kong with its legal and equitable interest solely owned by Mr. Wong Kung Tok. Anhai Hengda was owned by Mr. Wong Kung Tok’s family, which was considered an act-in-concert party of Mr. Wong Kung Tok for accounting purposes.

 

Hengda is principally engaged in the manufacture and sale of ceramic tiles used for exterior siding and for interior flooring and design in residential and commercial buildings.

 

Hengda’s owners reorganized the corporate structure in 2008 and 2009 (the “Hengda Reorganization” or the “Reorganization”), as follows:

 

Stand Best Creation Limited (“Stand Best”) was established on January 17, 2008 under the laws of Hong Kong with its paid-up share capital being HK$1.00 divided into 1 ordinary share solely owned by Mr. Wong Kung Tok. Stand Best acquired 100% of Hengda’s equity interest from Anhai Hengda and Chi Wah on April 1, 2008 at the consideration of RMB58,980,000.

 

Success Winner Limited (“Success Winner”) was incorporated in the British Virgin Islands on May 29, 2009 as a limited liability company. Its paid-up and issued capital is US$1 divided into 1 ordinary share solely owned by Mr. Wong Kung Tok.

 

On June 30, 2009, through a capitalization agreement between Mr. Wong Kung Tok and Stand Best, Stand Best capitalized a shareholder loan due to Mr. Wong Kung Tok in the amount of HK$67.9 million (equivalent to approximately RMB58.9 million) through the issuance of an aggregate of 9,999 ordinary shares of HK$1.00 par value which Mr. Wong Kung Tok allotted to Success Winner.

 

On the same date, Mr. Wong Kung Tok transferred his ownership of the remaining 1 ordinary share of Stand Best to Success Winner, thus making Success Winner the sole parent company of Stand Best.

 

On January 8, 2010, Hengda completed the acquisition of all voting equity interests of Jiangxi Hengdali Ceramic Materials Co., Ltd. (“Hengdali” or the “Gaoan Facility”), located in Gaoan, Jiangxi Province (the “Hengdali Acquisition”). Hengdali manufactures and sells ceramics tiles used for exterior siding and for interior flooring. In total, Hengda assumed loans of RMB 60.0 million and paid cash consideration of RMB185.5 million for the acquisition.

 

On September 17, 2013, Fujian Province Hengdali Building Materials Co., Ltd. (“Fujian Hengdali”) was incorporated in Pingtan, Fujian Province, 100% owned by Hengda. Fujian Hengdali’s approved scope of business includes sales of building materials and interior and exterior decoration materials.

 

F-7
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

1.GENERAL INFORMATION (Continued)

 

China Ceramics and its subsidiaries’ (the “Company”) corporate structure as of December 31, 2014 is as follows:

 

 

Name  Place and date of
incorporation or
establishment/
operations		  Nominal value of
issued ordinary
share
/registered
capital		  Percentage of
equity
attributable to the
Company		  Principal activities
         Direct  Indirect   
Success Winner Limited  British Virgin Islands,
May 29, 2009		  US$1  100  -  Investment holding
                
Stand Best Creation Limited  Hong Kong,
January 17, 2008		  HK$10,000  -  100  Investment holding
                
Jinjiang Hengda Ceramics Co., Ltd. (note)  PRC,
September 30, 1993		  RMB288,880,000  -  100  Manufacture and sale of ceramic tiles
                
Jiangxi Hengdali Ceramic Materials Co., Ltd. (Note (note)  PRC,
May 4, 2008		  RMB55,880,000  -  100  Manufacture and sale of ceramic tiles
                
Fujian Province Hengdali Building Materials Co., Ltd (note)  PRC,
September 17,2013		  RMB1,000,000  -  100  Sale of building and decoration materials

 

Note: All The registered capital of Hengda, Hengdali and Fujian Hengdali had been fully paid up.

 

F-8
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

2.1Basis of preparation

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards and Interpretations issued by the IASB.

 

The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarized below. These policies have been consistently applied to all the years presented unless otherwise stated. The adoption of new or amended IFRSs and the impacts on the Company’s financial statements, if any, are disclosed in Note 3.

 

The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments that have been measured at fair value.

 

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying amounts of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Judgments made by management in the application of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 4.

 

The consolidated financial statements were approved and authorized for issue by the Board of Directors on April 20, 2015.

 

2.2Basis of consolidation

 

The Success Winner Acquisition on November 22, 2009 has been accounted for as a reverse recapitalization. The acquisition agreement resulted in the former owner of Success Winner obtaining effective operating and financial control of the combined entity. Prior to the acquisition, China Ceramics had no operating business. Accordingly, the acquisition does not constitute a business combination for accounting purposes and is accounted for as a capital transaction. That is, the transaction is in substance a reverse recapitalization, equivalent to the issuance of equity interests by Success Winner for the net monetary assets of China Ceramics accompanied by a recapitalization. The consolidated financial statements are a continuation of the financial statements of Success Winner. The assets and liabilities of China Ceramics are recognized at their carrying amounts at the date of acquisition with a corresponding credit to the consolidated equity and no goodwill or other intangible assets are recognized. The equity of the combined entity recognized at the date of acquisition represents the equity balances of Success Winner together with the deemed proceeds from the reverse recapitalization determined as described above. However, the equity structure presented in the consolidated financial statements (number and values of equity instruments issued) reflects the equity structure of the legal parent, China Ceramics. Costs directly attributable to the transaction have been debited to equity to the extent of net monetary assets received.

 

Success Winner and its subsidiaries as a group is regarded as a continuing entity resulting from the Hengda Reorganization since the management of all the entities which took part in the Reorganization were controlled by the same director and shareholder before and immediately after the Reorganization. Immediately after the Reorganization, there was a continuation of the control over the entities’ financial and operating policy decision and risk and benefits to the ultimate shareholders that existed prior to the Reorganization. Accordingly, the reorganization has been accounted for as a reorganization under common control and the financial statements of Success Winner, Stand Best and Hengda have been combined on the basis of merger accounting for all periods presented.

 

The assets and liabilities of the combining entities or businesses are combined using the existing book values from the controlling party’s perspective. No amount is recognized as consideration for goodwill or excess of the acquirer’s interest in the net fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combination. The consolidated statement of comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or the date of their incorporation/establishment or since the date when the combining entities or businesses first came under common control, where this is a shorter period, regardless of the date of the common control combination.

 

The Hengdali Acquisition on January 8, 2010 has been accounted for as a business combination using the acquisition method. Hengdali is a subsidiary of the Company, and the Company has the power to govern the financial and operating policies which accompanies its shareholding of 100% of the voting rights in Hengdali. Therefore, Hengdali as a subsidiary is fully consolidated from January 8, 2010, the date on which control was transferred to the Company.

 

F-9
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.2Basis of consolidation (Continued)

 

The accounting for the Hengdali Acquisition under the acquisition method, treats the consideration transferred for the acquisition of Hengdali as the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in this business combination are measured initially at their fair values at the acquisition date.

 

The excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill.

 

The Company’s financial statements consolidate those of the Company and all of its subsidiaries as of December 31, 2014. Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Company has power, only substantive rights (held by the Company and other parties) are considered. All subsidiaries have a reporting date of December 31.

 

An investment in a subsidiary is consolidated into the consolidated financial statements form the date that control commences until the date that control ceases. Inter-company transactions, balances and unrealized gains or losses on transactions between group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.

 

2.3Foreign currency translation

 

The financial statements are presented in RMB (to the nearest thousand), being the currency that best reflects the economic substance of the underlying events and circumstances relevant to the Company. The Company’s operations are conducted through the subsidiaries in the People’s Republic of China (“PRC”). The functional currency of these subsidiaries is Renminbi (“RMB”).The functional currency of China Ceramics is the United State dollars (US$).

 

In the individual financial statements of the consolidated entities, foreign currency transactions are translated into the functional currency of the individual entity using the exchange rates prevailing at the dates of the transactions. At the reporting date, monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the reporting date retranslation of monetary assets and liabilities are recognized in profit or loss.

 

Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined and are reported as part of the fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

In the consolidated financial statements, all individual financial statements of foreign operations, originally presented in a currency different from the Company’s presentation currency, have been converted into Renminbi. Assets and liabilities have been translated into Renminbi at the closing rates at the reporting date. Income and expenses have been converted into Renminbi at the exchange rates ruling at the transaction dates, or at the average rates over the reporting period provided that the exchange rates do not fluctuate significantly. Any differences arising from this procedure have been recognized in other comprehensive income and accumulated separately in the currency translation reserve in equity.

 

When a foreign operation is sold, such exchange differences are reclassified from equity to profit or loss as part of the gain or loss on sale.

 

The translation of certain RMB amounts as of and for the year ended December 31, 2014 into US$ is included in these financial statements solely for the convenience of readers and was made at the rate of RMB6.2046 to US$1.00, which was based on the noon buying rate on December 31, 2014 in The City of New York cable transfers of RMB as certified for customers purposes by the Federal Reserve Bank of New York. Such translation should be construed as representation that RMB amounts could be converted, realized or settled into US$ at the rate stated above or at any other rate.

 

2.4Property, plant and equipment

 

Leasehold land and buildings for own use

 

When a lease includes both land and building elements, the Company assesses the classification of each element as a finance or an operating lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Company, unless it is clear that both elements are operating leases in which case the entire lease is classified as an operating lease. Specifically, the minimum lease payments (including any lump sum upfront payments) are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease.

 

F-10
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.4Property, plant and equipment (Continued)

 

To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that is accounted for as an operating lease is presented as "land use rights" in the consolidated statements of financial position and is amortized over the lease term on a straight-line basis.

 

All buildings are depreciated over their expected useful lives of 40 years.

 

Other property, plant and equipment

 

Property, plant and equipment are stated in the consolidated statements of financial position at cost less any accumulated depreciation and any accumulated impairment losses.

 

Depreciation is provided to write off the cost less their residual values over their estimated useful lives as follows, using the straight-line method:

 

Plant and machinery 10 years
Motor vehicles 10 years
Office equipment 5 years

 

The assets’ residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

 

Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other costs, such as repairs and maintenance, are charged to profit or loss during the financial period in which they are incurred.

 

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

 

The gain or loss arising on retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

 

2.5Land use rights

 

Upfront payments made to acquire land held under an operating lease are stated at cost less accumulated amortization and any accumulated impairment losses. Amortization is calculated on a straight line basis over the leasing period of 50 years.

 

2.6Goodwill

 

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

 

For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination.

 

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently whenever there is indication that the unit may be impaired. If some or all of the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable amount of the cash-generating unit is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit on a pro – rata basis based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

 

On disposal of the relevant cash generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

 

F-11
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.7Inventories

 

Inventories are carried at the lower of cost and net realizable value. Cost is determined using the weighted average basis, and in the case of work in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overhead.

 

Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and applicable selling expenses.

 

When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.

 

2.8Cash and cash equivalents

 

Cash and cash equivalents include cash at bank and in hand, demand deposits with banks and short term highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. For the purpose of the statement of cash flows presentation, cash and cash equivalents include bank overdrafts which are repayable on demand and form an integral part of the Company’s cash management.

 

2.9Financial instruments

 

Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transaction costs, except for those carried at fair value through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below.

 

Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or expires.

 

Classification and subsequent measurement of financial assets

 

The Company’s financial assets include cash and short-term deposits, trade receivables and derivative financial instruments.

 

For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into the following categories upon initial recognition:

 

- Loans and receivables

 

- Financial assets at fair value through profit or loss (“FVTPL”)

 

- Held-to-maturity (“HTM”) investments

 

- Available-for-sale (“AFS”) financial assets

 

All financial assets except for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below.

 

All income and expenses relating to financial assets are recognized in profit and loss.

 

Loans and receivables

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue. After initial recognition, these are subsequently measured at amortized cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Company’s cash and trade receivables fall into this category of financial instruments.

 

F-12
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.9Financial instruments (Continued)

 

Financial assets at FVTPL

 

Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply.

 

Assets in this category are measured at fair value with net changes in fair value presented in the consolidated statements of profit or loss and other comprehensive income. Transaction costs are expensed as incurred. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists.

 

HTM investments

 

HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturity other than loans and receivables. Investments are classified as HTM if the Company has the intention and ability to hold them until maturity.

 

HTM investments are measured subsequently at amortized cost using the effective interest method. The Company does not have any financial assets classified as HTM.

 

AFS financial assets

 

AFS financial assets are non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. The Company does not have any financial assets classified as AFS.

 

After initial measurement, AFS financial investments are subsequently measured at fair value with unrealized gains or losses recognized in other comprehensive income and credited in the AFS reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired. Interest calculated using the effective interest method and dividends are recognized in profit or loss within finance income.

 

Impairment of financial assets

 

The Company assesses, at the end of each reporting period, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment could include:

 

•significant financial difficulty of the issuer or counterparty; or
•breach of contract, such as default or delinquency in interest or principal payments; or
•it becoming probable that the borrower will enter bankruptcy or financial re-organization; or
•significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

 

If any such evidence exists, the impairment loss on trade and other financial assets carried at amortized cost is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate, where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

 

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years.

 

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognized in respect of trade debtors, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Company is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognized in profit or loss.

 

F-13
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.9Financial instruments (Continued)

 

Classification and subsequent measurement of financial liabilities

 

Financial liabilities are classified as FVTPL, or other financial liabilities, as appropriate upon initial recognition. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired.

 

(i)Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. Subsequent to the initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Company’s other financial liabilities include trade and other payables and bank borrowings.

 

(ii)Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Financial liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments (including separated embedded derivatives) held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in profit or loss.

 

2.10Derivative financial instruments

 

Initial recognition and subsequent measurement

 

The Company uses derivative financial instruments, such as forward currency contracts, for investment purposes. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss.

 

2.11Leases

 

Finance leases refers to the situation that the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards of ownership of the leased asset.

 

All other leases are treated as operating leases. Where the Company has the use of assets under operating leases, payments made under the leases are charged to profit or loss on a straight line basis over the lease terms except where an alternative basis is more representative of the time pattern of benefits to be derived from the leased assets. Lease incentives received are recognized in profit or loss as an integral part of the aggregate net lease payments made. Contingent rental are charged to profit or loss in the accounting period in which they are incurred.

 

All the leases of the Company are operating leases for the years ended December 31, 2014, 2013 and 2012.

 

2.12Provisions and contingencies

 

Provisions for product warranties, legal disputes, onerous contracts or other claims are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

 

All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

 

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within the control of the Company are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

 

F-14
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.13Share capital

 

Ordinary shares are classified as equity. Share capital is determined using the nominal value of shares that have been issued.

 

Any transaction costs associated with the issuing of shares are deducted from share premium (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction.

 

2.14Revenue recognition

 

Revenue comprises the fair value of the consideration received or receivable for the sale of goods, net of rebates and discounts. In 2012, the Company paid rebates to some distributors on their annual cash collections. No such rebates were paid to distributors since year 2013. Provided it is probable that the economic benefits will flow to the Company and the revenue and costs, if applicable, can be measured reliably, revenue is recognized as follows:

 

Sales of goods are recognized upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered and the customer has accepted the goods. Once goods are accepted by a customer, there is no continuing management involvement with the goods and the Company does not have the obligation to accept the return of the goods to the Company from the customer.

 

Interest income is recognized on a time- proportion basis using the effective interest method.

 

2.15Impairment of non-financial assets

 

Impairment testing is made on the Company’s goodwill at each reporting date. Property, plant and equipment and land use rights are tested for impairment if there is any indication that the assets may be impaired at the balance sheet date.

 

If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount.

 

Calculation of recoverable amount

 

An asset’s recoverable amount is the greater of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

 

Recognition of impairment losses

 

An impairment loss is recognized in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to that cash-generating unit (or group of units), and then, to reduce on a pro rata basis the carrying amount of the other assets in the unit (or group of units), except that the carrying amount of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

 

Reversal of impairment losses

 

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favorable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

 

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognized in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognized.

 

F-15
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.16Employee benefits

 

Retirement benefits

 

The employees of the Company’s PRC subsidiaries are required to participate in a central pension scheme operated by the local municipal government. Contributions are recognized as an expense in profit or loss as employees render services during the year. The Company’s obligation under these plans is limited to the fixed percentage contributions payable.

 

Share-based employee remuneration

 

The Company operates equity-settled share-based remuneration plans for its employees. None of the Company’s plans feature any options for a cash settlement.

 

The fair value of share options granted to employees is recognized as an employee cost with a corresponding increase in the share-based payment reserve within equity. The fair value is measured at the grant date using the Black Scholes Option Pricing Model, taking into account the terms and conditions upon which the options were granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

 

During the vesting period, the number of share options expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognized in prior years is charged/credited to the profit or loss for the year under review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the share-based payment reserve. On the vesting date, the amount recognized as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the share-based payment reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares. The equity amount is recognized in the share-based payment reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained earnings).

 

2.17Borrowing costs

 

Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds. Borrowing costs directly attributable to the acquisition, construction or production of qualifying asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are expensed when incurred.

 

2.18Accounting for income taxes

 

Income tax comprises current tax and deferred tax.

 

Current tax and movements in deferred tax assets and liabilities are recognized in profit or loss except to the extent that they relate to items recognized in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognized in other comprehensive income or directly in equity, respectively.

 

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

 

Deferred tax is calculated using the liability method on temporary differences at the reporting date between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, tax losses available to be carried forward as well as other unused tax credits, to the extent that it is probable that taxable profit, including existing taxable temporary differences, will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.

 

Deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.

 

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the Company is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

 

Deferred tax is calculated, without discounting, at the tax rates that are expected to apply in the period the liability is settled or the asset realized, based on tax rate (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

F-16
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.18Accounting for income taxes (Continued)

 

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

 

Additional income taxes that arise from the distribution of dividends are recognized when the liability to pay the related dividends is recognized.

 

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets are offset against deferred tax liabilities, if the Company has the legally enforceable right to set off the recognized amounts and the following additional conditions are met:

 

(a)in the case of current tax assets and liabilities, the Company intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; or

 

(b)in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

 

(i)the same taxable entity; or

 

(ii)different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend either to settle current tax liabilities and realize the current tax assets on a net basis, or to settle the liabilities and realize the assets simultaneously.

 

2.19Research and development activities

 

Costs associated with research activities are expensed in profit or loss as they incur. Costs that are directly attributable to development activities are recognized as intangible assets if, and only if, all of the following have been demonstrated:

 

(i)the technical feasibility of completing the intangible asset so that the asset will be available for use or sale;

 

(ii)the intention to complete the intangible asset and use or sell it;

 

(iii)the ability to use or sell the intangible asset;

 

(iv)how the intangible asset will generate probable future economic benefits;

 

(v)the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

 

(vi)the ability to measure reliably the expenditure attributable to the intangible asset during its development.

 

The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognized, development expenditure is recognized in profit or loss in the period in which it is incurred.

 

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

 

Gains and losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.

 

F-17
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

2.20Segment reporting

 

The Company identifies operating segments and prepares segment information based on the regular internal financial information reported to the Chief Executive Officer and executive directors, who are the Company’s chief operating decision maker, for their decisions about the allocation of resources to the Company’s business components and for their review of the performance of those components.

 

Business segment

 

The Company operates principally in the manufacturing and sale of medium to high-end ceramic tiles. The Chief Executive Officer and executive directors regularly review the Company’s business as one business segment.

 

Geographical segment

 

The business of the Company is engaged entirely in the PRC. The Chief Executive Officer and executive directors regularly review the Company’s business as one geographical segment.

 

2.21Related parties

 

(a)A person, or a close member of that person’s family, is related to the group if that person:

 

(i)has control or joint control over the group;

 

(ii)has significant influence over the group; or

 

(iii)is a member of the key management personnel of the group or the group’s parent.

 

(b)An entity is related to the group if any of the following conditions applies:

 

(iv)The entity and the group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

 

(v)One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

 

(vi)Both entities are joint ventures of the same third party.

 

(vii)One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

 

(viii)The entity is a post-employment benefit plan for the benefit of employees of either the group or an entity related to the group.

 

(ix)The entity is controlled or jointly controlled by a person identified in (a).

 

(x)A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

 

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

 

3.CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

 

3.1Adoption of new or amended IFRSs

 

In 2014, the Company has applied the following new or revised standards and amendments issued by the International Accounting Standards Board (“IASB”) relevant to the Company’s financial statements:

 

IFRS 10 and 12 and IAS 27(as revised in 2011)(Amendments) Investment Entities

IAS 32 (Amendments) Offsetting Financial Assets and Financial Liabilities
IAS 36 (Amendments) Recoverable Amount Disclosures for Non-Financial Assets
IAS 39 (Amendments) Novation of Derivatives and Continuation of Hedge Accounting
IFRIC – INT 21 Levies

 

F-18
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

3.CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (Continued)

 

3.1Adoption of new or amended IFRSs (Continued)

 

Except as described below, the application of the new and revised IFRSs in the current year has had no material impact on the Company’s financial performance and positions for the current and prior years and/or disclosures set out in these consolidated financial statements.

 

(a)Amendments to IFRS 10, IFRS 12 and IAS 27: Investment entities

 

These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments do not have an impact on the Company’s consolidated financial statements, since none of the entities in the Company qualify to be an investment entity under IFRS 10.

 

(b)Amendments to IAS 32: Offsetting financial assets and financial liabilities

 

These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. The amendments to IAS32 have no impact on the Company’s consolidated financial statements as they are consistent with the polices already adopted by the Company.

 

(c)Amendments to IAS 36: Recoverable amount disclosures for non-financial assets

 

These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36 on the recoverable amount of CGU which is not impaired. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognized or reversed during the period, and expand the disclosure requirements regarding the fair value measurement for these assets or units if their recoverable amounts are based on fair value less costs of disposal.

 

The directors of the Company reviewed and assessed the disclosure requirement in relation to the impairment assessment of the Company’s intangible assets with indefinite useful life in accordance with the requirements of IAS36. No disclosure of the recoverable amount of the CGU to which goodwill or these intangible assets with indefinite useful lives has been made. See Note 11 and Note 13 for details.

 

(d)Amendments to IAS 39: Novation of derivatives and continuation of hedge accounting

 

The amendments to IAS 39 provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The amendments also clarify that any change to the fair value of the derivative hedging instrument arising from the novation should be included in the assessment of hedge effectiveness. The adoption of these amendments to IAS39 does not have an impact on the Company’s consolidated financial statements as the Company does not have any derivatives that are subject to novation.

 

(e)IFRIC 21: Levies

 

IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of IFRIC 21 does not have an impact on the Company’s consolidated financial statements as the Company does not have any levy arrangements.

 

3.2Accounting standards issued but not yet effective

 

At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB but are not yet effective, and have not been adopted by the Company.

 

F-19
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

3.CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (Continued)

 

3.2Accounting standards issued but not yet effective (Continued)

 

IFRS 9 Financial Instruments3
IFRS 14 Regulatory Deferral Accounts4
IFRS 15 Revenue from Contracts with Customers6
Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations5
Amendments to HKAS 1 Disclosure Initiative5
Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation5
Amendments to IAS 27 Equity Method in Separate Financial Statements5
Amendments to IFRS 10,IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception5
Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture5
Amendments to IFRSs Annual Improvements to IFRSs 2010-2012 Cycle1
Amendments to IFRSs Annual Improvements to IFRSs 2011-2013 Cycle2
Amendments to IFRSs Annual Improvements to IFRSs 2012-2014 Cycle5

 

1 Effective for annual periods beginning on or after July 1, 2014 with limited exceptions

2 Effective for annual periods beginning on or after July 1, 2014

3 Effective for annual periods beginning on or after January 1, 2018

4 Effective for first annual IFRS financial statements beginning on or after January 1, 2016

5 Effective for annual periods beginning on or after January 1, 2016

6 Effective for annual periods beginning on or after January 1, 2017

 

IFRS 9 Financial Instruments

 

IFRS 9 issued in 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and further amended in 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.

 

Key requirements of IFRS 9 are described below:

 

ŸAll recognized financial assets that are within the scope of IAS 39 Financial Instruments Recognition and Measurement are subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.

 

ŸWith regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value of financial liabilities attributable to changes in the financial liabilities’ credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss was presented in profit or loss.

 

ŸIn relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.

 

The directors anticipate that the adoption of IFRS 9 in the future may not have significant impact on amounts reported in respect of the Group’s financial assets and financial liabilities existing as at the end of the current year.

 

F-20
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

4.CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

 

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The key sources of estimation uncertainty and key assumptions concerning the future at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

 

Useful lives and impairment assessment of property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written down to the recoverable amount and the amount of the write-down is charged against profit or loss.

 

Impairment loss recognized in respect of property, plant and equipment

 

As of 31 December 2014, the carrying amount of property, plant and equipment was approximately RMB718,418,000 (2013: RMB802,578,000 ; 2012: RMB795,983,000). There was no impairment loss recognized for the years ended December 31, 2014, 2013 and 2012. Determining whether property, plant and equipment are impaired requires an estimation of the recoverable amount of the property, plant and equipment. Such estimation was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.

 

Impairment loss recognized in respect of land use rights

 

As of 31 December 2014, the carrying amount of land use rights was approximately RMB29,259,000 (2013: RMB29,929,000; 2012: RMB30,598,000). There was no impairment loss recognized for the years ended December 31, 2014, 2013 and 2012. Determining whether land use rights are impaired requires an estimation of the recoverable amount of the land use rights. Such estimation was based on certain assumptions, which are subject to uncertainty and might materially differ from the actual results.

 

Impairment of goodwill

 

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Company to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material impairment loss may arise. No impairment was made on goodwill for the years ended December 31, 2014, 2013 and 2012.

 

Income tax

 

The Company has exposure to income taxes in the PRC. Significant judgment is required in determining the provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for expected tax issues based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The carrying amounts of the Company’s income tax payable as of December 31, 2014, 2013 and 2012 were RMB2,772,000, RMB1,520,000 and RMB869,000, respectively.

 

F-21
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

4.CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)

 

Impairment of trade receivables

 

The Company’s management assesses the collectability of trade receivables. This estimate is based on the credit history of the Company’s customers and the current market conditions. Management assesses the collectability of trade receivables at the balance sheet dates and makes the provision, if any. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in assessing the ultimate realization of these receivables, including the current creditworthiness, past collection history of each customer and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact the carrying value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed. The carrying amounts of the Company’s trade receivables as of December 31, 2014, 2013 and 2012 were RMB549,925,000,RMB490,989,000 and RMB455,885,000, respectively.

 

Net realizable value of inventories

 

Net realizable value of inventories is the management’s estimation of future selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These estimates are based on the current market condition and the historical experience of selling products of a similar nature. It could change significantly as a result of various market factors. The carrying amounts of the Company’s inventories as of December 31, 2014, 2013 and 2012 were RMB330,763,000, RMB307,436,000 and RMB290,603,000, respectively.

 

Share-based payment transaction

 

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 25.

 

5.REVENUE AND OTHER INCOME

 

Revenue comprises the fair value of the consideration received or receivable for the sale of goods. An analysis of the Company’s revenue and other income is as follows:

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Revenue               
Sale of goods   1,037,651    932,894    1,444,891 
Other income               
Interest income   429    467    380 
Foreign exchange gains/(losses)   -    189    (2)
    429    656    378 

 

6.FINANCE COSTS

 

Finance costs comprise interest expense on the Company’s bank borrowings:

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Interest on bank borrowings   4,556    4,201    9,319 

 

F-22
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

7.REALIZED AND UNREALIZED FAIR VALUE (LOSS)/GAIN ON DERIVATIVE FINANCIAL INSTRUMENTS

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Realized and unrealized fair value (loss)/gain on derivative financial instruments (Note 29(d))   (59,477)   3,346    - 

 

8.(LOSS)/PROFIT BEFORE TAXATION

 

The Company’s (loss)/profit before taxation is arrived at after charging:

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Cost of inventories recognized as expense(1)   928,823    876,869    1,056,692 
Depreciation expenses   69,450    69,553    66,186 
Amortization of land use rights   670    669    669 
Auditors’ remuneration               
–         Audit fees   5,992    3,245    2,762 
–         Audit-related fees   -    -    70 
    5,992    3,245    2,832 
Directors’ remuneration               
–         salaries and related cost   888    1,370    1,386 
–         retirement scheme contribution   -    10    10 
–         share-based payments   21    1,449    3,901 
Key management personnel (other than directors)               
–         salaries and related cost   731    488    435 
–         retirement scheme contribution   19    8    8 
–         share-based payments   129    668    1,750 
Research and development personnel               
–         salaries and related cost   1,302    1,040    1,169 
–         retirement scheme contribution   55    72    68 
Other personnel               
–         salaries and related cost   65,720    61,267    63,407 
–         retirement scheme contribution   7,783    7,659    8,606 
Total employee benefit expenses   76,648    74,031    80,740 

 

(1)        Cost of inventories recognized as expense included staff costs of RMB57,547,000, RMB53,027,000 and RMB55,961,000, retirement scheme contribution of RMB6,766,000, RMB6,676,000 and RMB7,589,000, depreciation and amortization expense of RMB68,459,000, RMB68,737,000 and RMB65,659,000, operating lease charges of RMB11,552,000, RMB11,552,000 and RMB11,552,000 and write-down of inventories of RMB2,181,000, RMB23,414,000 and RMB4,237,000 for the years ended December 31, 2014, 2013 and 2012, respectively, which amounts are also included in the respective total amounts disclosed separately for each of these types of expenses.

 

F-23
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

9.INCOME TAX EXPENSE/(CREDIT)

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Current Tax:               
PRC Income Tax   14,403    9,750    86,026 
Over-provision of PRC Income Tax in prior year   (42)   (2,870)   - 
    14,361    6,880    86,026 
Deferred tax expense   2,102    (8,545)   (1,094)
    16,463    (1,665)   84,932 

 

Reconciliation between income tax expense (credit) and (loss) profit before taxation at applicable tax rates is as follows:

 

   For the years ended December 31, 
   2014
RMB’000		   2013
RMB’000		   2012
RMB’000		 
(Loss)/profit before taxation   (13,890)   (3,697)   328,763 
Tax calculated at a tax rate of 25%   (3,473)   (924)   82,191 
Tax effect on non-deductible expenses   11,519    44    95 
Tax effect on non-taxable income   -    (507)   - 
Tax effect on different tax rates of group entities operating in other jurisdictions   8,300    1,347    2,646 
Withholding tax on profits retained by a PRC subsidiary   159    1,245    - 
Over-provision of PRC Income Tax in prior year   (42)   (2,870)   - 
    16,463    (1,665)   84,932 

 

British Virgin Islands Profits Tax

 

The Company has not been subject to any taxation in this jurisdiction for the years ended December 31, 2014, 2013 and 2012.

 

Hong Kong Profits Tax

 

The subsidiary in Hong Kong is subject to tax charged on Hong Kong sourced income with a statutory tax rate of 16.5% for the years ended December 31, 2014, 2013 and 2012. No Hong Kong profits tax has been provided as the Company has no assessable profit arising in Hong Kong for the years ended December 31, 2014, 2013 and 2012.

 

PRC Income Tax

 

The subsidiaries in the PRC are subject to the enterprise income tax in accordance with “PRC Enterprise Income Tax Law” (“EIT Law”), and the applicable income tax rate for the years ended December 31, 2014, 2013 and 2012 is 25%.

 

Under the prevailing EIT Law and its relevant regulations, any dividends paid by the Company’s PRC subsidiaries to an overseas parent made out of profits earned after January 1, 2008 to non-PRC corporate residents are subject to a 10% PRC dividend withholding tax, unless reduced by tax treaties or arrangements. In addition, under the Sino-Hong Kong Double Tax Arrangement and its relevant regulations, a qualified Hong Kong tax resident will be liable for withholding tax at the rate of 5% for dividend income derived from the PRC if the Hong Kong tax resident is the “beneficial owner” and holds 25% or more of the equity interests of the PRC company. Deferred tax liabilities have been provided for based on the expected dividends to be distributed from these subsidiaries in the foreseeable future in respect of the profits generated since 1 January 2008.

 

Dividends withholding tax represents tax charged/to be charged by the PRC tax authority on dividends distributed or intended to be distributed by the Group’s subsidiaries in Mainland China during the years.

 

F-24
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

9.INCOME TAX EXPENSE/(CREDIT) (Continued)

 

Deferred tax (assets)/liabilities recognized in the consolidated statements of financial position and the movements during the years are as follows:

 

   Dividend withholding   Inventory   Net operating   Depreciation and     
Deferred tax arising from:  tax   provision   loss   amortization   Total 
   RMB’000   RMB’000   RMB’000   RMB’000   RMB’000 
As of January 1, 2012   -    -    -    1,087    1,087 
Credits for the year   -    (1,059)   -    (35)   (1,094)
As of December 31, 2012   -    (1,059)   -    1,052    (7)
Charges/(credits) for the year   1,245    (5,854)   (3,901)   (35)   (8,545)
As of December 31, 2013   1,245    (6,913)   (3,901)   1,017    (8,552)
Charges/(credits) for the year   159    (546)   2,524    (35)   2,102 
As of December 31, 2014   1,404    (7,459)   (1,377)   982    (6,450)

 

For the purpose of presentation in the consolidated statements of financial position, certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances in the consolidated statements of financial position for financial presentation purposes:

 

   As of December 31, 
   2014
RMB’000		   2013
RMB’000		   2012
RMB’000		 
Deferred tax assets   (7,854)   (9,797)   (1,059)
Deferred tax liabilities   1,404    1,245    1,052 
    (6,450)   (8,552)   (7)

 

Hengda and Hengdali, the Company’s PRC subsidiaries, have cumulative undistributed earnings of RMB1,126,612,000, RMB1,076,028,000 and RMB1,056,030,000, as of December 31, 2014, 2013 and 2012, which are included in consolidated retained earnings. Deferred tax liabilities of RMB1,404,000, RMB1,245,000 and nil have been recognized to the extent of distributable profits earned by Hengda as of December 31, 2014, 2013 and 2012. No provision has been made for deferred taxes related to future repatriation of the remaining earnings, as the Company controls the dividend policy of these PRC subsidiaries and it has been determined that it is probable that these profits will not be distributed in the foreseeable future. If the Company were to distribute these cumulated earnings in the foreseeable future, the deferred tax liabilities of RMB56,331,000, RMB53,801,000 and RMB52,802,000 would be recognized as of December 31, 2014, 2013 and 2012, respectively.

 

10.(LOSS)/EARNINGS PER SHARE

 

   For the years ended December 31, 
   2014   2013   2012 
(Loss)/profit attributable to holders of ordinary shares (RMB’000):   (30,353)   (2,032)   243,831 
                
Weighted average number of ordinary shares outstanding used in computing basic and diluted (loss)/earnings per share   20,430,838    20,430,838    20,430,838 
                
(Loss)/earnings per share - basic (RMB)   (1.49)   (0.10)   11.93 
(Loss)/earnings per share - diluted (RMB)   (1.49)   (0.10)   11.93 

 

11.GOODWILL

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Carrying amount               
At end of the year   3,735    3,735    3,735 

 

On January 8, 2010, the Company consummated the acquisition of all voting equity interests of Hengdali (which is considered to be a CGU), and the excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill (Note 26).

 

The Company performs a goodwill impairment test annually. No impairment loss was recognized for the years ended December 31, 2014, 2013 and 2012.

 

F-25
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

12. PROPERTY, PLANT AND EQUIPMENT

 

   Buildings
RMB'000		   Plant and
machinery
RMB'000		   Motor
vehicles
RMB'000		   Office
equipment
RMB'000		   Total
RMB'000		 
Cost                         
At January 1,2012   332,563    612,745    6,548    1,840    953,696 
Additions   -    18,542    -    978    19,520 
Disposals   -    (14,542)   -    (875)   (15,417)
At December 31,2012   332,563    616,745    6,548    1,943    957,799 
Additions   11,272    85,706    -    90    97,068 
Disposals   -    (28,302)   -    -    (28,302)
At December 31,2013   343,835    674,149    6,548    2,033    1,026,565 
Disposals   -    (21,483)   (197)   -    (21,680)
At December 31,2014   343,835    652,666    6,351    2,033    1,004,885 
                          
Accumulated depreciation                         
At January 1,2012   10,708    94,974    3,384    1,201    110,267 
Depreciation charge   7,830    57,576    569    211    66,186 
Disposals   -    (13,806)   -    (831)   (14,637)
At December 31, 2012   18,538    138,744    3,953    581    161,816 
Depreciation charge   8,014    60,669    562    308    69,553 
Disposals   -    (7,382)   -    -    (7,382)
At December 31, 2013   26,552    192,031    4,515    889    223,987 
Depreciation charge   8,197    60,433    520    299    69,450 
Disposals   -    (6,783)   (186)   -    (6,970)
At December 31, 2014   34,749    245,681    4,849    1,188    286,467 
                          
Carrying amount                         
At December 31, 2012   314,025    478,001    2,595    1,362    795,983 
At December 31, 2013   317,283    482,118    2,033    1,144    802,578 
At December 31, 2014   309,086    406,985    1,502    845    718,418 

 

All property, plant and equipment held by the Company are located in the PRC. The Company’s buildings are situated on land under medium-term land use rights.

 

For the buildings owned collectively by the Company and other three unrelated companies, the cost of buildings are stated according to the amounts paid by the Company for its part of buildings, which represent the Company’s interests in the buildings. Buildings are depreciated over their expected useful lives of 40 years. These buildings’ cost was RMB3,363,000, and accumulated depreciation of these buildings was RMB1,418,000, RMB1,306,000 and RMB1,194,000 at December 31, 2014, 2013 and 2012, respectively. These buildings with a carrying value of approximately RMB1,945,000, RMB2,057,000 and RMB2,169,000 were pledged to secure the Company’s interest-bearing bank borrowings at December 31, 2014, 2013 and 2012, respectively (Note 21).

 

No impairment loss was made to the carrying amounts of the property, plant and equipment for 2014, 2013 and 2012.

 

Loss on disposal of property, plant and equipment in 2014, 2013 and 2012 was RMB3,537,000, RMB18,926,000 and RMB512,000, respectively.

 

F-26
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

13.LAND USE RIGHTS

 

The Company’s land use rights are under medium-term leases in the PRC, and are analyzed for reporting purposes as follows:

 

   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Cost               
At January 1, 2012, December 31, 2012, 2013 and 2014   32,619    32,619    32,619 
Accumulated amortization               
At beginning of the year   (2,690)   (2,021)   (1,352)
Amortization   (670)   (669)   (669)
    (3,360)   (2,690)   (2,021)
Carrying amount               
At December 31   29,259    29,929    30,598 

 

All the land use rights of the Company were pledged to the banks as securities for the Company’s interest-bearing bank borrowings at December 31, 2014, 2013 and 2012 respectively (Note 21).

 

14.LONG-TERM PREPAID EXPENSES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Prepaid advertising fees   1,404    -    - 

 

The amount represents the advertising fees paid in advance covering periods over one year.

 

15.INVENTORIES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Raw materials   38,405    52,881    38,154 
Work in progress   5,657    5,663    5,315 
Finished goods   286,701    248,892    247,134 
    330,763    307,436    290,603 

 

The analysis of the amount of inventories recognized as an expense and included in profit or loss is as follows:

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Carrying amount of inventories sold   926,642    853,455    1,052,455 
Write down of inventories (included in cost of sales)   2,181    23,414    4,237 
    928,823    876,869    1,056,692 
                
Write down of inventories (included in administrative expenses)   257    -    - 

 

F-27
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

16.TRADE RECEIVABLES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Trade receivables   549,925    490,989    455,885 
Less: provision for impairment   -    -    - 
    549,925    490,989    455,885 

 

The Company’s trade receivables are denominated in Renminbi and non-interest bearing. In 2011, the credit period granted to distributors was generally for a period within 90 days. Since the end of 2012, the Company had extended the collection period to 150 days to address funding pressures of its distributors. Other customers were granted a credit period of 90 days in the years ended December 31 2013 and 2012 and extended to 120 days in the year ended December 2014.

 

All of the trade receivables are expected to be recovered within one year. An aging analysis of the Company's trade receivables, based on the invoice date, is as follows:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Within 90 days   280,946    257,707    287,036 
Between 3 and 6 months   268,979    233,282    168,849 
    549,925    490,989    455,885 

 

An aging analysis of trade receivables that were neither past due nor impaired or past due but not impaired, is as follows:

 

       Past due but not impaired     
   Neither past due nor
impaired		   Less than 30
days		   31 to 120 days   Over 120
days		   Sub-total   Total 
   RMB'000   RMB'000   RMB'000   RMB'000   RMB'000   RMB'000 
December 31, 2012   455,885    -    -    -    -    455,885 
December 31, 2013   490,989    -    -    -    -    490,989 
December 31, 2014   549,925    -    -    -    -    549,925 

 

Receivables that were neither past due nor impaired relate to a large number of customers for whom there was no recent history of default. All amounts are short-term. The Company does not hold any collateral over these receivables.

 

The net carrying value of trade receivables is considered a reasonable approximation of fair value.

 

As of December 31, 2014, the Company is exposed to certain credit risks as 9% and 25% of the total trade receivables were due from the Company's largest and the five largest customers, respectively.

 

As of December 31, 2013, the Company is exposed to certain credit risks as 8% and 21% of the total trade receivables were due from the Company's largest and the five largest customers, respectively.

 

As of December 31, 2012, the Company is exposed to certain credit risks as 13% and 23% of the total trade receivables were due from the Company's largest and the five largest customers, respectively.

 

F-28
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

17.OTHER RECEIVABLES AND PREPAYMENTS

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Prepayments   2,178    2,160    4,092 
Deposit to stock transfer agent   -    11,831    - 
VAT recoverable   -    1,534    - 
    2,178    15,525    4,092 

 

An amount of RMB11,831,000 was paid to the stock transfer agent to meet dividend obligations declared before December 31, 2013 and paid in January 2014 (Note 24).

 

All of the other receivables and prepayments are expected to be recovered or recognized as expense within one year. The net carrying value of these balances is considered a reasonable approximation of fair value.

 

18.RESTRICTED CASH AND CASH AND BANK BALANCES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Cash on hand   62    42    28 
Cash at banks   61,093    28,806    89,420 
Cash and bank balances   61,155    28,848    89,448 
Restricted cash   28,872    37,359    - 
    90,027    66,207    89,448 

 

Restricted cash and cash and bank balances are denominated in the following currencies:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Renminbi   89,864    55,467    88,837 
Hong Kong dollars   -    2    41 
US dollars   163    10,738    570 
    90,027    66,207    89,448 

 

Bank balances denominated in Renminbi are deposited with banks in the PRC and are not freely convertible to foreign currencies. The conversion of these RMB denominated balances into foreign currencies is subject to the foreign exchange control rules and regulations promulgated by the PRC Government.

 

Bank balances denominated in US dollars are mainly held in bank accounts in Hong Kong and the United States of America.

 

Cash at banks and bank deposits comprise cash held by the Company and short-term bank deposits with an original maturity of three months or less. The deposits carry interest at prevailing market rates.

 

As of December 31, 2014, the Company has restricted cash of RMB28,872,000 (2013: RMB37,359,000; 2012: nil), of which RMB28,872,000 (2013: RMB28,872,000; 2012: nil) was used as collateral for the Company’s bank borrowings (Note 21) and nil was used as collateral for the Company’s financial derivatives (2013: RMB8,487,000; 2012: nil). They were temporarily not available for general use by the Company.

 

F-29
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

19.TRADE PAYABLES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Trade payables   122,168    152,572    115,123 

 

Trade payables are denominated in Renminbi, non-interest bearing and generally settled within 120-day terms. All of the trade payables are expected to be settled within one year. The carrying value of trade payables is considered to be a reasonable approximation of fair value.

 

20.ACCRUED LIABILITIES AND OTHER PAYABLES

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Deposits received from distributors   21,000    19,800    21,800 
VAT payables   9,076    303    11,799 
Provision for litigation (Note 31)   5,274    -    - 
Accrued salary   5,177    4,953    4,649 
Accrued rent, electricity and water   4,211    4,051    4,389 
Accrued other taxes   1,901    999    2,744 
Dividend payable (Notes 17 and 24)   1,505    11,831    - 
Others   1,845    1,203    992 
    49,989    43,140    46,373 

 

Accrued liabilities and other payables are denominated in the following currencies:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Renminbi   43,161    31,170    46,326 
US dollars   6,828    11,970    47 
    49,989    43,140    46,373 

 

Deposits received represent deposits from the Company’s distributors. The Company usually requests a deposit from RMB400,000 to RMB1,000,000 from new distributors upon signing a distributorship agreement as security for the performance of their obligations under the distributorship agreement.

 

Accrued liabilities consist mainly of accrued rental, wages and utility expenses.

 

The carrying value of accrued liabilities and other payables is considered to be a reasonable approximation of fair value.

 

F-30
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

21.INTEREST- BEARING BANK BORROWINGS (SECURED)

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Short-term bank borrowings - repayable within one year – shown under current liabilities   84,704    99,652    10,000 
Long-term bank borrowings - repayable more than one year but not more than 5 years - shown under non-current liabilities   -    -    50,000 
    84,704    99,652    60,000 

 

Bank borrowings are denominated in the following currencies:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Renminbi   45,000    60,000    60,000 
US dollars   39,704    39,652    - 
    84,704    99,652    60,000 

 

The exposure of the Company’s loans is as follows:

 

   As of December 31
   2014  2013  2012
   Effective
interest rates %		  RMB’000   Effective
interest rates %		  RMB’000   Effective
interest rates %		  RMB’000 
Fixed rate borrowings:  8.16%   10,000   7.80%   10,000   -   - 
Variable rate borrowings:  2.48% - 7.80%   74,704   2.44% - 7.07%   89,652   6.62% - 7.34%   60,000 
       84,704       99,652       60,000 

 

All of the Company’s bank borrowings are carried at amortized cost. The carrying values of the Company’s bank borrowings approximate their fair value.

 

The Company’s banking facilities are pledged by bank deposits (Note 18), the Company’s buildings and land use rights (Notes 12 and 13), land use rights of third parties and guaranteed by related parties (Note 27), a subsidiary of the Company and third parties. As of December 31, 2014, 2013 and 2012, such banking facilities were utilized to the extent of RMB84,704,000, RMB99,652,000 and RMB60,000,000, respectively.

 

As of the end of the reporting periods, the Company has the following undrawn bank borrowing facilities:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Variable-rate - expiring within one year   98,365    81,154    40,000 

 

F-31
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

22.SHARE CAPITAL

 

   As of December 31, 
   2014   2013   2012 
   Number   US$   Number   US$   Number   US$ 
   of shares   ‘000   of shares   ‘000   of shares   ‘000 
Authorized:                              
Ordinary shares of US$0.001 each                              
At January 1 and December 31   51,000,000    51    51,000,000    51    51,000,000    51 

 

   As of December 31, 
   2014   2013   2012 
   Number   RMB   Number   RMB   Number   RMB 
   of shares   ‘000   of shares   ‘000   of shares   ‘000 
Issued:   20,430,838    137    20,430,838    137    23,430,838    157 
Outstanding and fully paid:                              
Ordinary shares of US$0.001 each                              
At January 1   20,430,838    137    20,430,838    137    18,254,002    124 
Issuance to Mr. Wong Kung Tok for achieving the 2011 performance threshold   -    -    -    -    2,176,836    13 
                               
At December 31   20,430,838    137(1)   20,430,838    137(1)   20,430,838    137(1)

 

(1) Equivalent to US$20,000

 

On November 21, 2007, CHAC consummated its initial public offering, or IPO, of 12,800,000 units, including 800,000 units subject to an over-allotment option, with each unit consisting of one ordinary share, US$0.001 par value per share, and one warrant to purchase one ordinary share at an exercise price of US$7.50 per share. The units were sold at an offering price of US$10.00 per unit, generating total gross proceeds of US$128,000,000. Simultaneously with the consummation of the IPO, CHAC consummated the private sale of 2,750,000 warrants to CHAC’s founders at a price of US$1.00 per warrant, generating total proceeds of US$2,750,000. CHAC’s founders had 3,200,000 ordinary shares as founding shares.

 

All ordinary shares are equally eligible to receive dividends and represent one vote at shareholders’ meetings of the Company.

 

Each warrant entitled the holder to purchase shares at US$7.50 per share, subject to adjustment in the event of stock dividends and splits, reclassifications, combinations and similar events for a period commencing on the later of: (a) completion of the business combination and (b) one year from the closing date of the IPO, and ending November 16, 2012. On November 16, 2012, all of the share purchase warrants expired and ceased to trade.

 

On November 20, 2009, pursuant to the acquisition agreement, China Ceramics acquired all of the issued and outstanding shares of Success Winner held by Mr. Wong Kung Tok in exchange for US$10.00 and 5,743,320 shares of China Ceramics. In addition, 8,185,763 shares of China Ceramics were placed in escrow (the “Contingent Shares”) and for release to Mr. Wong Kung Tok in the event certain earnings and stock price thresholds are achieved. Of the Contingent Shares, up to 5,185,763 Contingent Shares could have been released based on achieving growth in either net earnings before tax or net earnings after tax, following the completion of an annual audit. Additionally, 3,000,000 Contingent Shares could have been released if China Ceramics shares closed at or above certain share price targets for any twenty trading days within a thirty trading day period prior to April 30, 2012. The Contingent Shares were to be released without regard to continued employment and were only contingent on future earnings and the stock price of China Ceramics. On May 24, 2010, the Company issued 1,214,127 shares to Mr. Wong Kung Tok based on the audited earnings before tax result for the fiscal year 2009. On April 7, 2011, the Company issued 1,794,800 shares to Mr. Wong Kung Tok based on the audited earnings before tax result for the fiscal year 2010. On April 3, 2012, the Company issued 2,176,836 shares to Mr. Wong Kung Tok based on the audited earnings before tax result for the fiscal year 2011. No further Contingent Shares may be issued to Mr. Wong Kung Tok. The issuance of the Contingent Shares is accounted for as a stock dividend.

 

F-32
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

22.SHARE CAPITAL (Continued)

 

The share price targets for the issuance of the additional 3,000,000 Contingent Shares were not met by April 30, 2012.

 

Also, concurrent with the Success Winner Acquisition, the Company purchased an aggregate of 11,193,149 ordinary shares from the public stockholders for an aggregate purchase price of approximately RMB752.2 million in transactions intended to assure the successful completion of the business combination. In connection with the closing of the Success Winner Acquisition, the CHAC’s founders forfeited 1,600,000 of their founders’ shares to CHAC for cancellation.

 

On May 25, 2010, the Company purchased 996,051 public warrants from four warrant holders (all managed by a single entity) at a price of US$1.00 per warrant in a privately negotiated transaction. The total amount paid to purchase the public warrants was US$996,051 (equivalent to RMB6,803,000) and has been deducted from shareholders’ equity.

 

The Company initiated an exchange offer (the “Offer”) pursuant to which holders of all 14,553,949 of the Company’s outstanding warrants (the “Warrants”) had the opportunity to acquire the Company’s shares through a warrant for share exchange. The Company issued one share for every four warrants tendered. On September 1, 2010, pursuant to the terms of the tender offer, 11,779,649 warrants were exchanged for 2,944,904 shares, which are freely tradable.

 

On November 24, 2010, the Company closed an underwritten public offering of 3,350,000 shares at a price of US$7.75 per share for gross proceed of approximately RMB172.7 million. The total net proceeds of the offering to the Company, after deduction of underwriters’ commissions and discounts and estimated transaction expenses, were approximately RMB159.6 million.

 

23.RESERVES

 

(a)Statutory reserve

 

In accordance with the relevant laws and regulations of the PRC, the Company’s PRC subsidiaries are required to transfer 10% of its profit after taxation prepared in accordance with the accounting regulation of the PRC to the statutory reserve until the reserve balance reaches 50% of the respective registered capital. Such reserve may be used to offset accumulated losses or increase the registered capital of these subsidiaries, subject to the approval from the Board of Directors, and are not available for dividend distribution to the shareholders.

 

(b)Currency translation reserve

 

The reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations.

 

(c)Merger reserve

 

The merger reserve of the Company represents the difference between the nominal value of the shares of the subsidiaries acquired in the Hengda Reorganization (Note 1) over the nominal value of the shares of the Company issued in exchange thereof.

 

(d)Share-based payment reserve

 

After the successful consummation of the reverse recapitalization, Mr. Wong Kung Tok, the former sole shareholder of Success Winner, allotted a total of 1,521,528 China Ceramics’ ordinary shares to two financial advisors for their financial advisory services related to the recapitalization activities. The shared based payment reserve represents the fair value of these allotted shares measured based on the average market price over the service periods.

 

The share-based payment reserve also represents the equity-settled share options granted to employees (Note 25). The reserve is made up of the cumulative value of services received from employees recorded over the vesting period commencing from the grant date of equity-settled share options, and is reduced by the expiry or exercise of the share options.

 

(e)Reverse recapitalization reserve

 

The reverse recapitalization reserve arises as a result of the method of accounting for the Success Winner Acquisition. In accordance with IFRS, the acquisition has been accounted for as a reverse recapitalization.

 

F-33
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

23.RESERVES (Continued)

 

(f)Capital reverse

 

On July 31, 2014, Sound Treasure Limited, the Company’s largest shareholder and an affiliate of the Company’s Chief Executive Officer, entered into a three party agreement (the “Novation”) with the financial institution that originated the foreign currency transaction agreements and the Company. Under the Novation, Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and the Company was released from the liabilities arising under the foreign currency transaction agreements. As a result, after July 31, 2014, the Company is no longer required to fund any losses related to these agreements, and the Company will neither suffer any future liabilities arising under those agreements nor enjoy any benefit arising under those agreements.

 

At the time that each of the foreign currency transaction agreements was established with the financial institution, the Company was required to deposit monies with the financial institution. RMB6.7 million of a total of RMB15.6 million in deposits were funded on behalf of the Company by Wong Kung Tok (who is the brother-in-law of the Company’s Chief Executive Officer) at the request of the Chief Executive Officer, and were included in a total of RMB40.2 million in loans owed by the Company to Wong Kung Tok as of July 9, 2014. In connection with the Novation discussed above, the Company’s Chief Executive Officer, Sound Treasure Limited and Wong Kung Tok entered into an agreement with the Company (the “Offset Agreement”) pursuant to which loans totaling RMB20.7 million owed by the Company to Wong Kung Tok as of the date of the Offset Agreement were transferred to Sound Treasure Limited and then were forgiven by Sound Treasure Limited; and in return the Company agreed to forego any claim to RMB15.6 million in deposits under the foreign currency transaction agreements which were transferred to Sound Treasure Limited pursuant to the Novation. As a result of these transactions, Sound Treasure Limited released the Company from liabilities aggregating RMB76.8 million and the Company transferred ownership of RMB15.6 million in deposits held at the financial institution from the Company to Sound Treasure Limited. Except as disclosed above, neither the Company’s Chief Executive Officer nor any affiliate of the Chief Executive Officer received any remuneration for agreeing to assume the foreign currency transaction agreements. The material terms of the Novation and the Sound Treasure Agreement were reviewed and approved by the Audit Committee of the Company. As a result of the Novation and the Offset Agreement, approximately RMB76.8 million in liabilities on the Company’s books were extinguished in 2014 and the Capital Reserve account was increased by approximately RMB61.3 million.

 

24.DIVIDENDS

 

The Company paid a cash dividend of US$0.10 (equivalent to RMB0.61) per share each on July 13, 2013 and January 14, 2014, respectively, to its shareholders which totaled in aggregate US$4.1 million (equivalent to RMB24.9 million gross, RMB23.66 million net of 5% PRC withholding tax (Note 9)).

 

The Company paid a cash dividend of US$0.0125 (equivalent to RMB0.08) per share each on July 14, 2014 and January 14, 2015, respectively, to its shareholders which totaled in aggregate US$0.5 million (equivalent to RMB3.2 million gross, RMB3.01 million net of 5% PRC withholding tax(Note 9)).

 

F-34
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

25.SHARE-BASED EMPLOYEE REMUNERATION

 

At the annual meeting on December 27, 2010, the shareholders of the Company approved the 2010 Incentive Compensation Plan (“the Plan”), which was designed to retain directors and senior management. In accordance with the Plan, the Company granted an aggregate of 1,130,000 stock options to the Company’s then directors (Huang Jia Dong, Su Wei Feng, Su Pei Zhi, Paul K. Kelly, Cheng Yan Davis, Ding Wei Dong and William L. Stulginsky) and executives (Hen Man Edmund), upon the approval by the Board of Directors on January 27, 2011, the grant date. The exercise price of the share options granted is US$7.65 per share and the share options are valid for a period of 5 years from January 27, 2011 to January 27, 2016. One-fourth of the options granted vested on the grant date and additional one-fourth of the options will vest on the one-year anniversary of the grant date.

 

Share options and weighted average exercise prices are as follows for the reporting periods presented:

 

   Number of shares   Weighted average
exercise price
US$		 
Outstanding at January 1 and December 31, 2012   1,130,000    7.65 
Granted   -    - 
Forfeited   (20,000)   7.65 
Exercised   -    - 
Outstanding at December 31, 2013 and 2014   1,110,000    7.65 
           
Exercisable at December 31, 2012   565,000    7.65 
Exercisable at December 31, 2013   832,500    7.65 
Exercisable at December 31, 2014   1,110,000    7.65 

 

The total fair value of the share options granted under the Plan is RMB25,643,000. The fair values of options granted were determined using a variation of the Black-Scholes Option Pricing Model that takes into account factors specific to the share incentive plans, such as the vesting period. The following principal assumptions were used in the valuation:

 

Grant date   January 27, 2011 
Vesting period ends   January 27, 2014 
Share price at date of grant   US$7.65  
Exercise price at date of grant   US$7.65  
Volatility   65% 
Option life   5 years 
Dividend yield   0% 
Risk-free interest rate   1.98% 
Fair value at grant date   US$3.52  
Weighted average remaining contractual life   3.25 years 

 

The underlying expected volatility was determined by reference to historical data of the Company’s shares over a period of time, adjusted for any expected changes to future volatility based on publicly available information. Expected dividends are based on historical dividends. Changes in the subjective input assumptions could materially affect the fair value estimate.

 

For the years ended December 31, 2014, 2013 and 2012, employee remuneration expense (all of which related to equity-settled share-based payment transactions) of RMB150,000, RMB2,117,000 and RMB5,651,000, respectively, has been included in profit or loss and credited to the share-based payment reserve.

 

F-35
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

26.BUSINESS COMBINATIONS

 

On January 8, 2010, the Company consummated the acquisition of all voting equity interests of Hengdali, a company that manufactures and sells ceramics tiles used for exterior siding and for interior flooring, for a total cash consideration of RMB185,517,000. The acquisition is intended to increase the Company’s production capacity and reduce costs through economies of scale.

 

Details of the purchase consideration, the net assets acquired and goodwill are as follows:

 

   Fair value 
   RMB’000 
Cash and cash equivalents   3,822 
Property, plant and equipment   206,532 
Land use rights   32,439 
Inventories   11,473 
Receivables   400 
Payables   (11,728)
Borrowings   (60,000)
Deferred tax liability   (1,156)
Total identified assets   181,782 
Goodwill   3,735 
Purchase consideration, satisfied in cash   185,517 

 

The goodwill is attributable to Hengdali’s strong production capacity, foreseeable profitability and synergies expected to arise from the economies of scale after the acquisition. None of the goodwill is expected to be deductible for tax purposes.

 

27.SIGNIFICANT RELATED PARTY TRANSACTIONS

 

(a)Apart from those discussed elsewhere in these financial statements, the following are significant related party transactions entered into between the Company and its related parties at agreed rates:

 

   For the years ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Service fees paid to Stuart Management Co.   -    503    526 

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Amounts owed to related parties   24,902    8,539    4,796 

 

Pursuant to an administrative services agreement dated as of December 1, 2009 between the Company and Stuart Management Co., an affiliate of Paul K. Kelly, an ex-director who resigned on Nov 27, 2013, the Company paid US$7,000 (equivalent to RMB44,000) a month plus out-of-pocket expenses to Stuart Management Co. for administrative services. The initial one-year term began on December 1, 2009, and the agreement automatically renews for successive one-year terms unless either party notifies the other of its intent not to renew. During the term of the agreement, Stuart Management Co. will provide the Company with general administrative services, including acting as the Company’s administrative agent in the United States and the British Virgin Islands, and allow the Company to utilize certain of its office space for meetings. The agreement was renewed to reduce the amount to US$4,900 (equivalent to RMB30,000) a month in December 2013. The amount was further reduced to US$1,000 (equivalent to RMB6,000) a month commencing from October 2014.

 

Mr. Huang Jia Dong, the founder and Chairman of Hengda and the Chief Executive Officer and one of the directors of the Company, and a holder of approximately 40.3% equity interests of the Company as of April 17, 2015 and Mr. Wong Kung Tok, formerly one of the Company’s significant shareholders, provide working capital loans to the Company from time to time during the normal course of its business. These loans amounted to RMB24,902,000, RMB8,539,000 and RMB4,796,000 as of December 31, 2014, 2013 and 2012, respectively. These loans are interest free, unsecured and repayable on demand. Mr. Huang and Mr. Wong are brothers-in-law. Mr. Huang and Mr. Wong are brothers-in-law. In July 2014, an entity affiliated with Mr. Huang assumed RMB20.7 million in loans due from the Company to Mr. Wong and then forgave those loans (see Note 23(f)).

 

(b)Mr. Huang Jia Dong and Su Pei Zhi provide personal guarantees to the Company for certain bank loans. The guarantees amounted to RMB102,800,000, RMB102,800,000 and RMB180,000,000 as of December 31, 2014, 2013 and 2012, respectively. Mr. Su resigned as a director on April 27, 2014 but remains as the Company’s sales deputy general manager.

 

F-36
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

28.COMMITMENTS

 

(a)Operating lease commitments

 

The Company leases production factories, warehouses and employees’ hostel from unrelated parties under non-cancellable operating lease arrangements. The leases have varying terms and the total future minimum lease payments of the Company under non-cancellable operating leases are payable as follows:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Within one year   5,607    11,552    11,552 
After one year and within five years   453    6,060    17,612 
    6,060    17,612    29,164 

 

The leases typically run for an initial period of three to five years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually increased every five years to reflect market rentals. None of the leases includes contingent rentals.

 

(b)Capital commitments

 

The Company’s capital expenditures consist of expenditures on property, plant and equipment and capital contribution. Capital expenditures contracted for at the balance sheet date but not recognized in the financial statements are as follows:

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Contracted for capital commitment in respect of capital contribution to its wholly foreign owned subsidiary in the PRC:               
– Hengda   -    14,047    22,867 
Contracted but not provided for in the financial statements
– acquisition of property, plant and equipment		   -    -    1,392 

 

 

The Company paid up the remaining capital of Hengda of RMB14,047,000 in 2014.

 

(c)Other commitments

 

The Company had the following other commitments:

 

   Year ended December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Advertising expenditure contracted but not provided for in the financial statements   2,439    6,200    1,260 

 

F-37
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

29.FINANCIAL RISK MANAGEMENT

 

The Company’s overall financial risk management program seeks to minimize potential adverse effects of financial performance of the Company. Management has in place processes and procedures to monitor the Company’s risk exposures while balancing the costs associated with such monitoring and management against the costs of risk occurrence. The Company’s risk management policies are reviewed periodically for changes in market conditions and the Company’s operations.

 

The Company is exposed to financial risks arising from its operations and the use of financial instruments. The key financial risks included credit risk, liquidity risk, interest rate risk, foreign currency risk and market price risk.

 

Except as disclosed in (d), the Company does not hold or issue derivative financial instruments for trading purposes or to hedge against fluctuations, if any, in interest rates and foreign exchange rates.

 

(a)Credit risk

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company’s exposure to credit risk arises primarily from bank balances and trade receivables. For trade receivables, the Company adopts the policy of dealing only with customers of appropriate credit history to mitigate credit risk. For other financial assets, the Company adopts the policy of dealing only with high credit quality counterparties.

 

As the Company does not hold any collateral, the maximum exposure to credit risk for each class of financial assets is the carrying amount of that class of financial assets presented on the consolidated statements of financial position.

 

Cash and bank balances

 

The Company’s bank deposits are placed with reputable banks in the PRC, Hong Kong and the United States, which management believes are of high credit quality. The Company performs periodic evaluations of the relative credit standing of these financial institutions.

 

Trade receivables

 

The Company’s objective is to seek continual growth while minimizing losses incurred due to increased credit risk exposure.

 

The Company’s exposure to credit risks is influenced mainly by the individual characteristics of each customer. The Company typically gives the existing customers credit terms of approximately 120 days to 150 days. In deciding whether credit shall be extended, the Company will take into consideration factors such as the relationship with the customer, its payment history and credit worthiness. In relation to new customers, the sales and marketing department will prepare credit proposals for approval by the Chief Executive Officer.

 

The Company performs ongoing credit evaluations of its customers’ financial condition and requires no collateral from its customers. The provision for impairment loss for doubtful debts is based upon a review of the expected collectability of all trade and other receivables.

 

The Company’s concentration of credit risk by geographical location is wholly in the PRC as of December 31, 2014, 2013 and 2012. Further details of the Company’s concentration of credit risk are set out in Note 16.

 

F-38
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

29.FINANCIAL RISK MANAGEMENT (Continued)

 

(b)Liquidity risk

 

The Company’s policy is to regularly monitor current and expected liquidity requirements and its compliance with loan covenants to ensure that it maintains a sufficient amount of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

 

The following table details the Company’s remaining contractual maturities for its financial liabilities. The table has been drawn up based on undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are at a floating rate, the undiscounted amount is calculated based on interest rate at the end of the reporting periods:

 

   As of December 31,2014 
       More than 1   Total contractual     
       year but less   undiscounted   Carrying 
   Within 1 year   than 3 years   cash flow   amount 
   RMB’000   RMB’000   RMB’000   RMB’000 
Trade payables   122,168    -    122,168    122,168 
Amounts owed to related parties   24,902    -    24,902    24,902 
Interest-bearing bank borrowings   85,671    -    85,671    84,704 
Total   232,741    -    232,741    231,774 

 

   As of December 31,2013 
       More than 1   Total contractual     
       year but less   undiscounted   Carrying 
   Within 1 year   than 3 years   cash flow   amount 
   RMB’000   RMB’000   RMB’000   RMB’000 
Trade payables   152,572    -    152,572    152,572 
Amounts owed to related parties   8,539    -    8,539    8,539 
Interest-bearing bank borrowings   103,280    -    103,280    99,652 
Total   264,391    -    264,391    260,763 

 

   As of December 31,2012 
       More than 1   Total contractual     
       year but less   undiscounted   Carrying 
   Within 1 year   than 3 years   cash flow   amount 
   RMB’000   RMB’000   RMB’000   RMB’000 
Trade payables   115,123    -    115,123    115,123 
Amounts owed to related parties   4,796    -    4,796    4,796 
Interest-bearing bank borrowings   14,096    52,321    66,417    60,000 
Total   134,015    52,321    186,336    179,919 

 

(c)Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of the Company’s financial instruments will fluctuate because of changes in market interest rates.

 

The Company’s exposure to interest rate risk arises primarily from the Company’s interest-bearing bank deposits and borrowings. The interest rates and terms of repayment of the bank borrowings are disclosed in Note 21.

 

The Company is exposed to fair value interest rate risk in relation to its fixed-rate bank borrowings. Bank borrowings subject to fixed interest rates are contractually repriced at intervals of 12 months. The Company currently does not have an interest rate hedging policy. However, the management monitors interest rate exposure and will consider other necessary actions when significant interest rate exposure is anticipated.

 

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CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

29.FINANCIAL RISK MANAGEMENT (Continued)

 

(c) Interest rate risk (Continued)

 

The Company is also exposed to cash flow interest rate risk related to bank balances and cash held at financial institutions carried at the prevailing market rates and variable-rate bank borrowings.

 

At December 31, 2014, if average interest rate on the Company’s variable-rate bank borrowings had been 50 basis points higher/lower, loss before tax for the year ended December 31, 2014 would have been increased/decreased by RMB374,000/RMB 374,000 (2013: increased/decreased loss before tax by approximately RMB448,000/RMB448,000 2012: decreased/increased profit before tax by approximately RMB300,000/RMB300,000). A 50 basis points (2013 and 2012: 50 basis points) increase or decrease in interest rates is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. The analysis is performed on the same basis for 2013 and 2012.

 

(d)Foreign currency risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises when transactions are denominated in foreign currencies.

 

The Company is mainly exposed to foreign exchange risk arising from future commercial transactions, recognized assets and liabilities denominated in currencies other than the functional currency of the group entities to which they relate. The Company’s operations are primarily conducted in the PRC. All the sales and purchases transactions are denominated in RMB. As such, the operations are not exposed to exchange rate fluctuation.

 

As of December 31, 2014, 2013 and 2012, nearly all of the Company’s monetary assets and monetary liabilities were denominated in RMB except that as of December 31, 2014 and 2013, certain bank balances (Note 18), bank borrowings (Note 21) and other payables (Note 20) were denominated in US dollars.

 

The Company entered into foreign currency forward contracts for investment purposes. The net fair value of foreign exchange forward contracts entered into by the Company at December 31, 2013 was RMB44,000 and has been recognized as derivative financial instruments included under current assets on the consolidated statements of financial position. In 2014, as the Renminbi depreciated against the U.S. dollar, the Company incurred realized and unrealized losses totaling RMB59,477,000 from January 1 to July 31, 2014 in connection with these agreements (Note 7).

 

On July 31, 2014, Sound Treasure Limited, the Company’s largest shareholder and an affiliate of the Company’s Chief Executive Officer, entered into a three party agreement (the “Novation”) with the financial institution that originated the foreign currency transaction agreements and the Company. Under the Novation, Sound Treasure Limited assumed these agreements and all assets (mainly deposits placed with the financial institution) and all existing and future liabilities arising under these agreements, and we were released from the liabilities arising under the foreign currency transaction agreements. As a result, after July 31, 2014, the Company is no longer required to fund any losses related to these agreements, and the Company will neither suffer any future liabilities arising under those agreements nor enjoy any benefit arising under those agreements (Note 23(f)).

 

Sensitivity analysis

 

The Group’s foreign currency risk is mainly concentrated on the fluctuation of US$ and HK$. The following table details the Group’s sensitivity to a 4% increase and decrease in RMB against the relevant foreign currencies. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the years end for a 4% change. On this basis, if RMB strengthens against foreign currencies by 4%, the Group’s (loss)/profit before taxation for the year would decrease by the following amount, and vice versa.

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
(Loss)/profit before taxation   1,855    (32,215)1   21 

 

1 Mainly as a result of fair value (including foreign exchange) losses/gains on foreign currency forward contracts.

 

The sensitivity analysis has been determined assuming that the change in foreign exchange rates had occurred at the end of the reporting period and had been applied to re-measure those financial instruments held by the Company which expose the Company to foreign currency risk at the end of the reporting period. The stated changes represent management’s assessment of reasonably possible changes in foreign exchange rates over the period until the end of next annual reporting period. The analysis is performed on the same basis for 2013 and 2012.

 

In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure at the end of the reporting period does not reflect the exposure during the year.

 

F-40
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

29.FINANCIAL RISK MANAGEMENT (Continued)

 

(e)Fair value measurements

 

(i)Financial instruments carried at fair value

Fair value hierarchy

 

The following table presents the fair value of the Company’s financial instruments measured at the end of the reporting period on a recurring basis, categorized into the three-level fair value hierarchy as defined in IFRS 13 Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:

 

·Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

·Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)

 

·Level 3: inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs). The Company’s directors are responsible to determine the appropriate valuation techniques and inputs for fair value measurements. The following table shows the fair value measurement hierarchy for assets and liabilities as of December 31, 2013:

 

Recurring fair value measurements  Level 1   Level 2   Level 3   Level 4 
   RMB’000   RMB’000   RMB’000   RMB’000 
Assets                    
Derivative financial instruments – foreign exchange forward contracts   -    44    -    44 

 

There were no transfers between instrument levels during the years ended December 31, 2014, 2013 and 2012.

 

As of December 31, 2014, 2013 and 2012, there were no other financial instruments measured on a recurring basis.

 

Derivative financial instruments (Level 2)

 

During 2013, the Company bought a CHN Target Redemption Forward from Taishin International Bank, a kind of financial product, for investing purpose. The financial product meets the definition of derivative: No initial net investment, value changes in response to the change of exchange rate (US$ vs RMB) and is settled at a future date.

 

The notional principal amounts of the outstanding foreign exchange forward contracts at December 31, 2013 are US$14,000,000 and at 2014 are nil.

 

At December 31, 2013, the Company recognized the fair value of the derivative based upon the MTM (Mark to market) report provided by Taishin International Bank, determined using forward exchange market rates at the end of the reporting period.

 

(ii)        Financial assets and liabilities measured at other than fair value

 

The carrying amounts of the Company’s other financial instruments carried at cost or amortized cost approximate their fair values as of December 31, 2014, 2013 and 2012.

 

F-41
 

 

CHINA CERAMICS CO. LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 2012, 2013 and 2014
 

 

30.CAPITAL MANAGEMENT

 

The Company’s objectives when managing capital are:

 

(i) To safeguard the Company’s ability to continue as a going concern and to be able to service its debts when they are due;

 

(ii) To maintain an optimal capital structure so as to maximize shareholder value; and

 

(iii) To maintain a strong credit rating and healthy capital ratios in order to support the Company’s stability and growth.

 

The Company actively and regularly reviews and manages its capital structure to ensure optimal shareholder returns, taking into consideration the future capital requirements of the Company and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. The Company manages its common shares and stock options as capital.

 

The Company is not subject to externally imposed capital requirements, except for, as disclosed in Note 23(a), the Company’s PRC subsidiaries are required by the Foreign Enterprise Law of the PRC to contribute to and maintain a non-distributable statutory reserve fund whose utilization is subject to approval by the Board of Directors. This externally imposed capital requirement has been complied with by the PRC subsidiaries for the years ended December 31, 2014, 2013 and 2012.

 

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, increase share capital, obtain new borrowings or sell assets to reduce debt.

 

There were no changes in the Company’s overall approach to capital management during the report periods.

 

The capital structure of the Company consists of debts (which include borrowings, less cash and cash equivalents) and equity attributable to shareholders of the Company (comprising issued capital and reserves). The Company monitors capital on the basis of the debt to capital ratio, which is calculated as net debts divided by equity attributable to shareholders of the Company.

 

   As of December 31, 
   2014   2013   2012 
   RMB’000   RMB’000   RMB’000 
Interest-bearing bank borrowings   84,704    99,652    60,000 
Amounts owed to related parties   24,902    8,539    4,796 
Total debt   109,606    108,191    64,796 
Less: Cash and cash equivalents (excluding restricted bank balances)   (61,155)   (28,848)   (89,448)
Net debts   48,451    79,343    (24,652)
Equity attributable to shareholders of the Company   1,447,624    1,419,572    1,443,190 
Gearing ratio   3.3%   5.6%   Not applicable 

 

31.LITIGATIONS

 

During 2014, several putative class action complaints were filed in the United States District Court for the Southern District of New York against the Company and various current and former directors and officers asserting claims of violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and asserting claims for violations of Section 20(a) of the Exchange Act against the individual defendants; and pursuing remedies under the Exchange Act.

 

On February 6, 2015, the Company and the individual defendants reached an agreement in principle to settle the above-described cases as against all defendants in consideration of the payment by the Company of US$850,000 (equivalent to approximately RMB5,274,000)(Note 20), consisting of a combination of cash and the Company’s common stock. The settlement is subject to the execution of a mutually acceptable settlement agreement and the approval of the settlement by the Court. A charge for the settlement amount is included as an expense item in the Company’s fiscal 2014 financial statements.

 

F-42